The value of gold in an investment portfolio

A small allocation to gold could add significant benefits to a client’s investment portfolio, writes BetaShares's Drew Corbett.

The value of including gold in a balanced investment portfolio was examined by Oxford Economics in 2011.

A detailed analysis of the performance drivers of gold was conducted over an extended historical period and a forward-looking model was built to illustrate the likely gold performance under a range of scenarios.

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The results showed gold is expected to underperform assets like equities in a benign/growth environment, but is expected to add significant portfolio benefits in deflationary and inflationary economic conditions. 

Most importantly, the findings further exemplified that the inclusion of gold bullion in a balanced portfolio had the additional benefit of reducing the expected volatility in the investment returns. 

We have run some analysis for Australian investors to demonstrate the portfolio benefit of including a 5 per cent exposure to physical gold bullion (with the A$/US$ exchange rate hedged).

We combined a 5 per cent allocation to physical gold bullion (currency hedged) with a 95 per cent allocation to the return of the S&P/ASX200.

Figure 1 shows that including a 5 per cent allocation to gold bullion would have significantly improved the return over five years ending August 2012.

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