Chart of the week

Gold vs US Equities

Most investors have zero exposure to gold in their portfolio, so they may be surprised to see that gold has outperformed US equities since 2000. What role does gold play in a diversified investment portfolio?

Gold is non-interest bearing money. Gold best contributes to a portfolio in tail environments - major equity selloffs, scenarios of currency debasement, and easy monetary policy relative to inflationary pressures. In US equity selloffs >15% since 1987, gold has delivered positive returns nine out of twelve times. Gold also has a low to negative correlation to equities which helps boost portfolio diversification.

So what to do? I don’t think you need to be a doomsday prepper to consider a reasonable allocation to gold based on its proven historical properties. It is likely best placed alongside a “real asset” allocation. What if we are headed towards a stagflationary environment? The assets that perform best in that environment are gold, commodities, and TIPS. For investors that can’t stomach the thought of reducing an allocation to stocks or bonds in place of gold, there are capital efficient funds that offer investors access to gold without “giving up” space in your portfolio.

Last note - the starting point for any chart is important. The starting point on this chart belies the fact that US equities have trounced gold since 1975 when ownership restrictions on gold were lifted, but the unique characteristics of gold make it valuable in the context of a total portfolio.

Chart Source - ReSolve Asset Management