Gold Likely to Outperform Other Traditional Inflation Hedges as a Strategic Asset

Gold Likely to Outperform Other Traditional Inflation Hedges as a Strategic Asset

Gold, traditionally a tactical inflation hedge, has proven to be a superior long-term strategic asset even if inflation remains tame, according to a study conducted by World Gold Council. Given the growing number of investors expressing concern over the prospect of future inflation, the study examined the relative performance of four traditional inflation hedges – gold, real estate, Treasury Inflation-Protected Securities (TIPS) and general commodities.

The study compared the real return, volatility and diversification properties of each asset over three historical periods and then used a portfolio optimizer to assess whether a strategic case could be made for any of the four, based on those periods and in a forecast scenario, where conservative real return assumptions were used for each asset.

In two of the three historical scenarios, gold proved more effective than commodities, real estate and TIPS at enhancing investor’s risk-adjusted returns, and achieving both the maximum reward-risk portfolio and the minimum-variance portfolio. The allocation to gold required to achieve these ranged from 4-9.9%. While a 6.9% allocation to gold produced the highest risk-reward portfolio in the forecast scenario. The study also found a strategic case for gold in the portfolio of an investor that already holds TIPS, due to the additional diversification benefits gold brings to a portfolio.

Natalie Dempster, Head of Investment, North America, World Gold Council commented:

“If, as many predict, inflation does materialize, then traditional inflation-hedges like gold, commodities, real estate and inflation-linked bonds are likely to outperform other mainstream financial assets.

“Investors who are unsure whether to add a targeted, short-run inflation hedge to their portfolio at this stage should understand that gold has been shown to enhance investors’ risk-adjusted returns even in a low to medium inflation environment.”

The full report can be found here: [pdf]

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