Investment Case for Gold - John Reade

Summary

John Reid, Head of Research and Chief Market Strategist at the World Gold Council, presents the case for including gold in investment portfolios. He highlights six key characteristics of gold: its historical returns, portfolio diversification benefits, low volatility, and its performance during periods of high inflation. Gold has consistently provided solid returns, often outperforming other asset classes, and offers a safe haven in times of economic uncertainty. By diversifying portfolios with gold, investors can improve risk-adjusted returns. The World Gold Council aims to make gold a mainstream investment asset.

Takeaways

• 😀 Gold has provided long-term returns since 1971, with an average return of 7.8%, comparable to other major asset classes like equities and commodities.
• 😀 Gold's performance isn't just during times of crisis or high inflation; its returns are consistent across different economic cycles.
• 😀 Gold has outperformed bonds, cash, and emerging market stocks since 1971, and offers competitive returns even during the past decade.
• 😀 Gold serves as an effective portfolio diversifier, with correlations to equities shifting depending on market conditions.
• 😀 During strong market performance, gold has a positive correlation with equities, but it flips to negative when equities fall sharply, reducing overall portfolio risk.
• 😀 Including gold in a portfolio typically improves risk-adjusted returns, lowering volatility and maximum drawdown.
• 😀 Despite being considered a risky asset, gold has low volatility compared to other assets, like emerging market equities and commodity indices.
• 😀 The gold market is highly liquid, with daily trade volume exceeding that of key markets like German bonds and Dow Jones stocks.
• 😀 Gold performs well not only during high inflation periods but also during times of low inflation, showing positive returns in both environments.
• 😀 Gold is an important strategic asset that should be considered a key part of most investment portfolios to enhance overall returns and reduce risks.

Q & A

What is the main purpose of this video by John Reid?

The main purpose of the video is to present the investment case for gold and explain why it should be a part of an investment portfolio. It complements a report titled *The Relevance of Gold as a Strategic Asset*.

What role does the World Gold Council play in the gold market?

The World Gold Council is a market development organization owned by 26 leading gold mining companies. It aims to make gold a mainstream investment asset by providing data, research, and tools to analyze the gold market and working with policymakers and central banks.

How has gold performed as an investment asset since 1971?

Since 1971, when gold was released from its peg against the U.S. dollar, it has provided an average return of 7.8%. This return has outperformed bonds, cash, and emerging market stocks, and is slightly below commodities, U.S. equities, and international equities.

What is the significance of gold's returns over a 20-year period?

Over a 20-year period to December 2008, gold returned 7.9%, outperforming every other asset class except for developed world equities, excluding the U.S. This demonstrates gold's ability to provide consistent long-term returns.

How does gold perform in comparison to other assets over shorter economic cycles?

Over shorter periods, gold's performance tends to be influenced by economic cycles. Although it has underperformed equities in the past decade due to the post-financial crisis recovery, this presents an opportunity for portfolio adjustments.

What makes gold an effective portfolio diversifier?

Gold is uncorrelated or negatively correlated with other major asset classes, particularly U.S. equities. During periods of strong stock market performance or sharp declines, gold behaves differently, making it a valuable tool for risk diversification.

Can you explain the correlation between gold and the S&P 500?

Gold shows a positive correlation with the S&P 500 when equities perform strongly, but when the S&P 500 falls sharply, gold becomes negatively correlated. This switchover helps diversify risk in a portfolio.

How does adding gold to a portfolio impact risk-adjusted returns?

Adding gold to a portfolio typically improves risk-adjusted returns. Even though gold’s absolute performance over the past decade was relatively modest, its inclusion reduced portfolio volatility and maximum drawdowns, enhancing overall portfolio performance.

What is the volatility of gold compared to other assets?

Gold's volatility has been low compared to other asset classes. Since 2009, gold's annualized daily volatility has been in line with the S&P 500 and international equities, but lower than commodities and emerging market equities.

How does gold perform during periods of high and low inflation?

Gold performs well during high inflation, with a nominal return of 15% and a real return of 8% when U.S. consumer price inflation exceeds 3%. However, it also provides positive returns during periods of low inflation, with a 3% nominal and 5% real return.