Portfolio diversification through gold- adding more than just glitter

  • Diversification — industrial commodities, including metals, energy and agri, share a direct relationship with economic growth and usually move in line with equities. Investors looking to diversify their assets may find portfolios less diversified even after including the broader commodity index. On the other hand, gold has a negative correlation with equities due to its safe-haven appeal and helps investors in the optimal diversification of portfolios.
  • Geopolitical risks — a number of countries, especially Russia and Ukraine, the Middle East and the countries involved in the South China Sea dispute, face growing geopolitical risks. Governments, central banks and investors tend to prefer gold during uncertain times. Any short-term escalation in geopolitical risks, such as that in recent weeks relating to Russia and Ukraine, could push demand for gold significantly higher and generate a good return for investors in the metal.
  • Limited supplies — gold mining production increased at a moderate CAGR of around 2.2% per year over the past decade to around 3,561 tonnes in 2021[2]. Gold mining is a profitable business but not very lucrative, limiting its appeal to attract substantial investments in the immediate term. Additionally, labour issues in gold mining and depleting reserves make it difficult to increase production significantly in the long term.
  • Availability of investment vehicles — investment in gold has historically been via purchasing jewellery, especially in Asian countries such as China and India, largely on account of the ease of transaction; however, this has added to the cost of gold procurement (fabrication charges and adulteration) and reduced the realised rate of return for investors in the short to medium term. However, with new investment vehicles (such as ETFs or gold bonds) increasingly available to retail investors, investment in gold is likely to remain strong over the next decade.

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Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/