Financial experts typically consider gold a safe haven investment, but with a 28 per cent slump in value last year and a 12 per cent gain in the first few months of 2014, the yellow metal has experienced volatility recently.
Axel Merk, president and CIO of Merk Investments, said that while gold has had an unusual 12-month spell, its performance over the last 10 years compared to the stock market make precious metals a sound investment.
Writing for Casey Research, he said gold has been one of the top-performing assets over the last decade, despite the 2013 decline. Mr Merk argued that investors made solid returns on their gold during this time.
In fact, using models of modern portfolio theory, his organisation calculated that the optimal portfolio allocation between gold and the S&P 500 over the last 10 years would have been 68:32 in favour of buying gold to stocks.
“Our findings are consistent with the general notion that adding an asset with a positive return that otherwise has a low correlation to an existing portfolio can help improve risk-adjusted returns,” he explained.
“This takes into account the level of risk in each asset class and the correlation between the two. Investing solely in the S&P comes with greater risk.”
When comparing gold to stocks and bonds, the ideal gold allocation dropped to 42 per cent – but, according to Mr Merk, the precious metal still performed better than the stocks/bonds part of the portfolio.
A 30-year view of gold buying
Using the same techniques, Merk Investments calculated the optimal mix between gold and S&P assets since 1971 and found a 29:71 split in favour of the latter.
Mr Merk acknowledged the proportion of gold dropped substantially when moving from a 10-year to a 33-year model, but argued a 29 per cent gold allocation is still higher than many market experts suggest.
“This analysis demonstrates that gold’s role in portfolio management has been under-appreciated,” he stated.
“Investors may want to consider actively looking to add uncorrelated assets to their portfolio, and gold should be part of any consideration.”
His comments come as new Gallup research reveals people are showing an increasingly negative outlook towards the US economy.
The company’s US Economic Confidence Index dipped to -16 on Tuesday (June 24), with many Americans feeling the situation is set to get worse.
“Thirty-eight per cent say the economy is getting better, while 58 per cent say it is getting worse, for an economic outlook score of -20 – a five-point drop from the previous week,” Gallup stated.
The results are the most pessimistic respondents have been since December last year.
With the US economy having a significant impact on global markets, the news is likely to see more investors shifting to safe haven assets such as gold and silver.
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