Gold is often characterised as a store of value (primarily against inflation) as well as an investment portfolio hedge against a range of other portfolio risks such as general financial market instability, geopolitical tensions, and currency weakness.
Gold tends to have a low, and at times, negative correlation to other asset classes, particularly in times of acute stress or in macroeconomic environments that are unfriendly to more traditional financial assets e.g. high inflation regimes.
Gold’s low or negative correlation is potentially attractive from a diversification standpoint, helping to dampen overall portfolio volatility. Therefore, gold can potentially complement other portfolio hedges such as high-grade fixed interest.
Gold is a higher volatility asset class, so we place it within the alternatives segment of diversified multi-asset portfolios. Physical gold holdings can, of course, be complemented or even replaced with an allocation to gold equities. Our current position in gold is fairly moderate. We have a 2% allocation in our multi-asset balanced fund and a 3% gold stock allocation within our Australia equity portfolio.
At present, we believe gold holds a degree of appeal in a portfolio context as cash and fixed interest offer very low yields. While our base case is that inflation ebbs on a 12-month view, we see a somewhat asymmetric risk profile for inflation, particularly relative to current market pricing in fixed interest markets. So, we think a moderate gold allocation is currently reasonable given the prevailing backdrop of very low interest rates, elevated equity markets and asymmetric inflation risk. In this week’s report we:
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David is one of Australia’s leading investment strategists.