Gold - Safety Blanket or Quilting Essential?

By: Adrian Ash | Wed, Feb 13, 2013
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The patchwork quilt of diversification looks awful smart. It's more than pretty with gold in it, too...

Investment experts keep telling us two things.

One, you must diversify your savings. Nothing works for ever. Two, your annual returns are set to be miserable, because there's no return to the out-sized gains of the 1980s and '90s. The last 10 years prove that.

Now, we don't doubt Point 1. Not even people buying gold in 2001 could in fact see the future (though we might tell you different tomorrow). That second claim needs a closer look, however.

US Assets, US Dollars: Total Annual Returns (before expenses & tax)
US Assets, US Dollars: Total Annual Returns (before expenses & tax)
Larger Image - Source: BullionVault via CRB, LBMA, NAREIT, NYU Stern, St.Louis Fed

REITS = FTSE Real Estate Investment Trusts
S&P = S&P 500 equity index
CCI = CRB Continuous Commodity Index
Corp = Barclays Aggregate US Bond Index
Trsy = 10-year US Treasury bonds
Cash = 3-month Treasury bills

The idea is simple enough. Our patchwork quilt above looks a lot like the more famous Callan Periodic Table (well, famous to finance nerds and investing professionals). It compares the annual returns on a selection of assets. In the case of the Callan Table, those assets are mostly stock-market indices, split into emerging markets vs. Europe vs. a range of thinly sliced US segments (Russell 2000 Growth anybody?).

But while that's useful, perhaps, for equity-fund investing, there are lots of other things which both private savers and the professional investors supposed to be working for them also buy. What about commodities, real estate, gold, cash or T-bonds?

Now, as you can, and just like the people Callan say - as well as more finely-sliced examples, such as Frank Holmes at US Funds ranking the different tradable commodities - "The Table highlights the uncertainty inherent in all capital markets.

"Rankings change every year."

There are broad patterns over time, however. No asset class makes #1 for more than two years running, for instance, not in the 35 years of data we've crunched. (More on the full table next week.) Most recently, and with the calls for a gold bear market in 2013 growing louder each day, it's also notable that:

The upshot? Going forwards, no idea. But looking at that "poor returns ahead" warning, it only gains credence from the past decade if you ignore gold. Which is of course what most packaged-finance promoters do. They might well ignore real estate and commodities as well.

Investing money evenly split however between US equities, investment-grade corporate bonds, Treasuries, cash, gold, commodities and real estate would have returned 6.5% per year on average, over and above inflation, since the start of 2003. Even if you'd avoided miserable gold all through the 1980s and '90s, you would still have made only 5.4% per year during those go-go decades.

Including an even allocation to gold investment, in fact, the last decade's returns stand very nearly two full percentage points better than the average real return since 1977 (again, pre-tax but post-inflation, and excluding trading costs). At 4.6% per annum, that 35-year average also sneaks ahead of the average return if you had avoided gold too, at 4.4%.

"Gold is the equivalent of a financial teddy bear," as one UK fund manager never tires of saying. And saying - and again. People cling to it, in short, for emotional support instead of rational reasons. Yet the patchwork quilt of a diversified portfolio is no mere safety blanket. And it's warmer still if you add gold to your color scheme.

 


 

Adrian Ash

Author: Adrian Ash

Adrian Ash
BullionVault.com

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the head of research at BullionVault, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the secure, low-cost gold and silver exchange for private investors. It enables you to buy and sell professional-grade bullion at live prices online, storing your physical property in market-accredited, non-bank vaults in London, New York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people from 97 countries used BullionVault, owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical silver (US$129m) as their outright property. There is no minimum investment and users can deal as little as one gram at a time. Each user's unique holding is proven, each day, by the public reconciliation of client property with formal bullion-market bar lists.

BullionVault is a full member of professional trade body the London Bullion Market Association (LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development body the World Gold Council (www.gold.org) joined with the internet and technology fund Augmentum Capital, which is backed by the London listed Rothschild Investment Trust (RIT Capital Partners), in making an $18.8 million (£12.5m) investment in the business.

For more information, visit http://www.bullionvault.com

© BullionVault 2006-2014

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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