4/10/2010
By Ilonka Oudenampsen
Investors who do not hold gold or view it purely as a temporary safe haven asset are failing to harness its full potential to protect wealth, according to a new study published by the World Gold Council (WGC).
A modest, consistent holding of gold mitigates the potential for significant loss of value during extreme market events, said the WGC. During the period between October 2007 and March 2009, an investor with a portfolio of US$10 million experienced an additional US$500,000 financial loss simply by not maintaining a position in gold.
The study used a composition similar to a benchmark portfolio, which included an 8.5 per cent allocation to gold, to show that total losses incurred during the period reduced by 5 per cent relative to an equivalent portfolio without gold.
In 18 of the 24 tail risk scenarios analysed by the WGC, portfolios which included gold outperformed those which did not. The term tail risk refers to extreme events that may be considered unlikely, such as the “Black Monday” market crash of October 1987, but which tend to have a considerably negative effect on an investor’s capital when they do occur.
Juan Carlos Artigas, investment research manager at the World Gold Council and author of the research, commented: “In the last decade we have seen two of the worst bear markets in the last hundred years. As one might expect, sensitivity to risk still runs high for investors around the world, and as assets are rebuilt an ability to protect capital irrespective of market conditions is paramount. Considering portfolio diversification is clearly important, but protecting against systemic risk can be an entirely separate matter.”
The analysis suggests that even relatively small allocations to gold, ranging from 2.3% to 9.0%, can have a positive impact. On average, such allocations can reduce the Value at Risk (VaR) while maintaining a similar return profile to equivalent portfolios which do not include gold.
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