September 2019

Gold Shines for Investors Looking to Diversify

Gold is an attractive part of an investment portfolio due to its low correlation to financial assets. An allocation to gold has historically improved returns and dampened volatility within a diversified portfolio, particularly for portfolios on the lower end of the risk spectrum.

Periods of high or unexpected inflation disproportionately reduce real returns for conservative portfolios with large allocations to cash and bonds relative to equities. Gold, however, can act as a store of value and insurance against high or unexpected inflation, making an allocation more appropriate when capital preservation is a primary focus.

Since gold is not a financial asset, traditional valuation measurements are difficult to apply. As a result, the timing of an allocation to gold can be difficult and should be based on gold’s relative attractiveness compared to other assets. First, as shown in the chart below, gold is relatively inexpensive today when compared to the S&P 500. Second, the opportunity cost of owning gold instead of fixed income assets is low due to very low (and sometimes negative) yields on global debt.


Source: Bloomberg

Historically gold has indeed been a store of real value. Since 1973 (the approximate end of the gold standard) gold has outpaced inflation (+6.9% annualized vs. +3.9% for the Consumer Price Index) and performed similarly to intermediate Treasuries (+6.6% annualized).

A multi-decade performance simulation shows that including an allocation of gold to an evenly split equity/fixed income portfolio results in outperformance versus a portfolio that doesn’t own gold. According to the simulation, since 1973, the portfolio with gold outperformed the one with no gold: +8.65% annualized gain with gold vs. +8.59% without. (The outperformance was even more pronounced in more conservative portfolios). In addition, gold also dampened the portfolio’s volatility.

Owning gold is most beneficial when real returns are negative or near zero, underscoring its contribution to protecting portfolio value. On the other hand, during the long bull market since 2011, gold’s drag on the performance of the blended portfolio has been surprisingly small at around -0.6% per year.

When leading economic indicators are at their weakest, a portfolio with an allocation to gold has shown the largest outperformance. For example, since 1973 there have been six periods where the annual change in the leading economic indicators was below zero. During four of those periods, a portfolio with a 5% allocation to gold outperformed a portfolio without gold (by an average of +1.0% per year). During the most recent period, when the leading economic indicators dipped below zero, a 50/50 portfolio performed +2.8% better with gold than without.

During periods of severe market shock (as shown below), gold makes even more of a difference: During the 1973-74 oil crisis, for example, a portfolio with gold outperformed one without it by +5.9%—the difference between a decline of almost 20% and one of less than 14%.


Source: Tiedemann Investment Group, multi-decade performance simulation

Like other investments, gold is not without its risks and there are a number of considerations that an investor should be aware of:

  1. While gold historically reduces the volatility of a diversified portfolio, on its own, gold can be substantially more volatile than cash equivalents.
  2. Gold is a negative carry asset, meaning there are costs associated with holding it that are not offset by the income it produces. This cost, however, is less significant in today’s low-interest-rate environment.
  3. In the U.S., long-term gains on gold are taxed at collectible rates of 28%, while short-term gains are taxed at ordinary income rates.

There are a few ways to allocate to gold including Exchange Traded Funds (ETF), physical bullion, gold-related equities and derivatives. In our opinion, the best approach is through an Exchange Traded Fund due to the low fees, ease of trading, and operational efficiencies. Specifically, we recommend the iShares Gold Trust ETF (ticker IAU) due to its low expense ratio and significant daily trading volume. Importantly, the ETF is backed by physical bullion held in a trust.

We believe gold can be an important portfolio allocation, especially for conservative-minded investors. It can offer protection during periods of slow economic growth, unexpected inflation and other unanticipated shocks. A gold allocation is further supported by its current value versus financial assets and its affordability against negative global yields, making today’s conditions a favorable time to initiate an allocation.


The post is authored by Kent Insley, Paul Buongiorno, and Matt Silbermann of Tiedemann Advisors.

Tiedemann Advisors is an investment advisor. The information presented herein is intended as an illustration of the services offered by Tiedemann. Such services may not be suitable for all individuals. This information is intended to serve as the basis of a discussion with a Tiedemann professional and does not constitute, and should not be construed as, the provision of tax, accounting or legal advice or investment recommendations. You should consult with your tax or legal advisors prior to entering into any planning or trust arrangements. Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals and objectives, risk tolerance, investment time horizon, tax situation and other relevant factors. These forecasts are subject to high levels of uncertainty. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Asset allocation does not guarantee a profit or protection from losses in a declining market. Investments in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investments, when sold, may be worth more or less than the original purchase price.

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