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Investors have often used gold tactically in their portfolios, aiming to preserve wealth with a relatively liquid asset that can potentially help navigate risk during market corrections, geopolitical stress or continued dollar weakness. But in addition to gold’s tactical advantages, its function as a core diversifying asset during a variety of business cycles may prove that gold can potentially play a long-term strategic role.
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Gold has the potential to enhance portfolio building strategies on several fronts – providing broad benefits that can potentially support strategic investment efforts over multiple business cycles. Primary potential benefits include:
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Here we show how the key pillars and historical benefits of gold investing can provide potential support for these vital elements of investors’ portfolios.
Managing risks—both short-term and unknown—is critical to optimizing portfolio performance. And gold’s historical advantages during a variety of market and business cycles can potentially provide a ballast for portfolios in good and bad.
Gold has demonstrated a low and negative historical correlation with many financial indices over time, potentially helping to smooth volatility and preserve wealth. For example, gold has shown a monthly correlation of 0.01 and 0.09 to the S&P 500 Index and Bloomberg US Aggregate Bond Index, respectively, since the 1970s.
This persistent and historically low correlation with many other financial assets is rooted in the various sources of demand for gold – both cyclical and countercyclical – which is illustrated in different phases of a complete economic cycle.
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Adding an allocation to gold can potentially provide diversification that can help reduce portfolio drawdowns, increase portfolio efficiency through higher Sharpe ratios and provide a potential store of value for investors over time.
Gold’s performance has the potential to shine during extreme market volatility and turbulence, growing less correlated with traditional stocks and offering a potential ballast for portfolios that can help limit withdrawals.
As 2020 transformed asset markets, investors were faced with building portfolios that could withstand the low interest rate and risk landscape. Gold’s historical advantages can potentially provide benefits to the modern portfolio that can help investors navigate these evolving risks.
Given gold’s low correlation with many traditional markets, gold has historically delivered positive returns during extreme bouts of market volatility and turmoil—earning it a “famous safe haven” reputation with some investors.
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Unlike several other asset classes typically used as portfolio diversifiers, gold has historically been an efficient source of portfolio diversification, with its low correlation historically growing stronger over time, while many real assets in have moved in the opposite direction,
Gold can be considered in more than just down markets, with the benefits it can potentially provide investors with longer term and strategic opportunities in terms of capital appreciation. Gold’s diversification and historically uncorrelated returns can potentially help limit portfolio development episodes, and that can help optimize portfolios by limiting capital constraints. But gold is not just for managing the downside and can provide the potential opportunity to help investors grow their capital during certain market cycles, with some growth potential of its own.
Gold has historically delivered competitive long-term returns through a variety of business cycles – good and bad – adding longer-term diversification that can potentially help optimize portfolio returns.
Bloomberg Finance, L.P., & State Street Global Advisors; LBMA Gold Price PM ($/oz) has demonstrated a monthly correlation of 0.01 and 0.09 with the S&P 500 Index and Bloomberg US Aggregate Bond Index, respectively. S&P 500 correlation is from 8/31/1971 to 06/30/2023 and Bloomberg US Aggregate Bond Index correlation is from 3/31/1976 to 06/30/2023 due to data availability. The correlation coefficient measures the strength and direction of a linear relationship between two variables. It measures the degree to which the deviation of one variable from its mean is related to that of another variable from its respective mean, with 0 being uncorrelated and 1 being perfectly correlated.
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Assets can be considered “safe havens” based on investor perception that the value of an asset will remain stable or climb even if the value of other investments declines during times of economic stress. Perceived safe-haven assets are not guaranteed to retain value at any time.
Bloomberg Finance, L.P., State Street Global Advisors. Data from 31/12/93 to 30/06/2023. Gold = gold spot price. Commodities = S&P GSCI Total Return Index, REITs = FTSE NAREIT All Equity REITS Total Return Index. Past performance is not a reliable indicator of future performance.
WorldGold Council, Bloomberg, Bank for International Settlements, London BullionMarket Association. Data as of December 31, 2022. Estimates based on clearing statistics published by the LBMA, LBMA-i and non-LBMA-i OT, COMEX, SHFE, SGE, LME kostber, Dubai Gold & Commodities Exchange, ICE Futures, US Metals, Borsa Istanbul , Bursa Malaysia, Moscow Exchange, and Tokyo Commodity Exchange.
WorldGold Council, Bloomberg, Bank for International Settlements, London BullionMarket Association. Data as of December 31, 2022. Estimates based on clearing statistics published by the LBMA, LBMA-i and non-LBMA-i OT (estimates represent daily averages in US$ billion for Q2’2020), COMEX, SHFE, SGE, LME precious , DubaiGold & Commodities Exchange, ICE Futures, US Metals, Borsa Istanbul, BursaMalaysia, Moscow Exchange, and Tokyo Commodity Exchange.
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Bloomberg Finance L.P., & State Street Global Advisors. Gold has increased at an average annual rate of 10.6% when price inflation was above 5% per year from August 31, 1971 to June 30, 2023.
Bloomberg Finance L.P., & State Street Global Advisors. LBMA Gold Price PM ($/oz) has shown a monthly correlation of -0.39 with the US Dollar Index from August 31, 1971 to June 30, 2023.
Bloomberg US Aggregate Bond Index A benchmark that provides a measure of the performance of the US dollar-denominated investment grade bond market. The “Agg” includes U.S. public offerings of investment-grade government bonds, investment-grade corporate bonds, mortgage pass-through securities, commercial mortgage-backed securities and asset-backed securities.
Bloomberg Emerging Markets USD Aggregate Bond TR Index A flagship hard currency Emerging Markets debt benchmark that includes USD-denominated debt of sovereign, quasi-sovereign, and Corporate EM issuers.
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Bloomberg Global Aggregate Corporate Bond TR Index A corporate index that is a flagship measure of global investment grade, fixed rate corporate debt. This multi-currency benchmark includes bonds from issuers from developed and emerging markets in the industrials, utilities and financials sectors.
Bloomberg Global Corporate High Yield Bond TR Index. The index represents the union of the US High Yield, the Pan-European High Yield, and Emerging Markets (EM) Hard Currency High Yield Indices. The subcomponents of high yield and emerging markets are mutually exclusive.
Bloomberg Global Aggregate Government Bond Index TR A government index that is a measure of investment grade rated debt from 25 local currency markets. This multi-currency benchmark includes Treasuries and government-related fixed-rate bonds from both developed and emerging market issuers.
Bloomberg World Inflation-Linked Bond TR Index Measures the investment grade, government inflation-linked debt of 12 different developed market countries. Investability is an important criterion for the inclusion of markets in this index, and it is designed to include only those markets in which a global government bond fund is likely to invest.
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Bloomberg Commodity Index TR A widely diversified commodity price index distributed by Bloomberg Indexes that tracks 22 commodity futures and seven sectors. No commodity can compose less than 2 percent or more than 15 percent of the index, and no sector can represent more than 33 percent of the index.
Commodities A commodity used in trade that is interchangeable, or “fungible”, with other commodities of the same type. Commodities are mostly used as inputs in the production of other goods or services. For example, crude oil is a commodity used to make motor fuels, heating oil and lubricants.
Correlation The historical tendency of two investments to move together. Investors often combine investments with low correlations to diversify portfolios.
Correlation coefficient The correlation coefficient measures the strength and direction of a linear relationship between two variables. It measures the extent to which the deviations of one variable from its mean are related to those of another variable from its respective mean.
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Diversification A strategy of combining a broad mix of investments and asset classes to limit potential risk, although diversification does not guarantee protection against a loss in falling markets.
Diversification benefits In modern portfolio theory, diversification is an approach used to reduce the overall risk of the portfolio as possible by keeping a mix of assets with low correlations with each other. The potential benefit of holding uncorrelated assets is that some investments can rise while others fall.
Downside Risk A given security’s potential to lose value if a prevailing market trend suddenly changes. The term also refers to the specific financial amount of the “worst-case” loss that can occur in such sudden shifts.
Drawdown A specific decline in the stock market during a specific time period that is measured in percentage terms as a peak-to-trough movement.
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Drawdown Protection Investments that could help isolate a total portfolio from a decline in stocks or other financial markets. Examples include cash or other investments that have historically held up relatively well
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