JAN 25, 2024
Gold has been a safe haven for literally thousands of years.
But how effective is it as a “hedge”?
A hedge is an asset that tends to rise when others fall. For example, an investor holding common stocks might find it advantageous to hold some gold too, since it has historically been strong during the worst stock market crashes.
But in the big picture, does it really pay to always have some gold in one’s portfolio?
History provides some clear answers. We analyzed several historical scenarios to see how a theoretical portfolio performed with various amounts of gold (including zero).
Our base portfolio starts with a 60% stock/40% bond mix. We used the S&P 500 for stocks, and the 10-year Treasury for bonds. As gold was added the prevailing spot price was used.
The research runs from January 1999 through September 2019, just shy of 21 years. This includes bull and bear markets in all assets, and thus offers accurate insight into gold’s value through various market environments.
We ran four portfolio scenarios, each starting with $100,000. As the amount of gold was gradually increased, the funds devoted to stocks and bonds were reduced in equal percentages.
No adjustments were made for inflation, and exclude commissions, dividends, and tax implications.
The first chart shows the value of each portfolio at the end of each year. The blue bar represents zero gold (60% stocks/40% bonds), while the gold bar represents a portfolio with the maximum 10% gold allocation.
As can be seen, the total value of each portfolio rises as the amount of gold is increased. A portfolio with 10% gold has performed better over the past two+ decades than ones with less amounts of gold.
After 20 years, only the portfolio with 10% gold reached a $250,000 value. This is not surprising considering gold acts as a hedge against stock market declines and recessions, while at other times can provide profit.
This chart shows the annual performance of each portfolio.
While all portfolios frequently rose and fell in tandem, the data show that those containing gold tended to fall less in bear markets and rise more in bull markets.
The exceptions were 2013 through 2015 where portfolios with gold underperformed those with no gold (the differences in 1999 and 2000 were less than 1%). In all other years gold improved portfolio returns.
On a cumulative basis, portfolios with gold have outperformed those with little to no gold.
The statistical differences between portfolios did not show up the first few years, but over time a portfolio with gold has clearly provided a greater return than a portfolio with little to no gold.
As research shows, an allocation to gold in a typical stock/bond portfolio has provided better returns than those with little or no gold. It also lowers your risk.
Portfolios that include gold have fallen less in bear markets and risen more in bull markets. The long-term value of a portfolio is clearly enhanced by including gold.
It should be pointed out that the research specifically uses gold, not “commodities”. Most commodity funds have only a small allocation to gold, so similar results should not be expected when including a mixed fund.
Research shows that adding gold to a portfolio enhances overall returns.
Can hedge against systemic risk, stock market pullbacks, and recessions.
Lowers the risk in a portfolio.
Can provide liquidity to meet liabilities during times of market stress.
Can hedge not just stocks but all paper assets. Since gold is a real hold-in-your-hand asset, it carries advantages almost no other asset can provide.
The message from history is clear: meaningful exposure to gold can improve your overall portfolio performance.