In times of market volatility, many investors look for ways to protect their capital. One asset that has gained relevance in this regard is gold. However, a key question often arises: How much gold should I have in my investment portfolio?
Gold is known as a “safe haven”, meaning that, historically, it tends to hold its value or even increase in times of crisis. Yet, despite this reputation, many investment portfolios still have little or no exposure to gold. In fact, according to a study conducted by Bank of America Global Research, Crescat Capital and Incrementum, AG in 2023, gold has less than a 1% allocation in 71% of portfolios designed by US financial advisors. Therefore, for most investors, gold remains the missing piece of the financial puzzle.
Based on the analysis “The Optimal Gold Allocation” prepared by In Gold We Trust, below we share four reflections to help you decide how much gold should be included in your investment portfolio.elp you decide how much gold should be included in your investment portfolio.
1. Why Consider Gold in Your Portfolio?
Gold offers multiple benefits to investors. In addition to serving as a hedge asset, it can also act as a diversifier in a stock and bond portfolio. In simple terms, when financial assets lose value, gold often behaves in the opposite way, helping to reduce overall portfolio losses.
Research by Incrementum AG reveals that an allocation of gold in a portfolio can increase the risk-adjusted returns. Specifically, an allocation of between 14% and 18% of gold was found to maximize the “Sharpe ratio,” a measure of how much return is earned for each unit of risk. This shows that not only does gold protect value, but it can also improve a portfolio’s overall performance.
Optimal Gold Allocation for Risk-Adjusted Return Maximization:
Gold Allocation (x-axis), and Sharpe Ratio (y-axis).
January 1970 - April 2024
A 40% gold allocation might offer higher returns, but it also comes with volatility and risk of significantly higher falls.
Optimal Gold Allocation for Performance Maximization:
Gold allocation (x-axis) and Sharpe ratio (y-axis).
January 1970 - April 2024
2. How Much Gold is Enough?
The answer is not one-size-fits-all. The optimal amount of gold in a portfolio depends on factors such as the investment horizon and your risk tolerance. For investors with a long-term investment outlook, at least 10 years, a gold allocation of around 13% might be ideal, as it helps reduce the risk of large declines in the portfolio value. However, for investors looking for greater protection in highly uncertain environments, such as the current one, experts suggest a higher allocation, which may be as high as 25% in gold.
3. Balancing Security and Performance
It is important to note that not all gold investments have the same characteristics. There are two main types of gold investment: "safe-haven gold" and "performance gold". The former generally involves the purchase of physical gold, such as coins or bullion, which act as an insurance against crises.
On the other hand, "performance gold" refers to investments in shares of gold mining companies or related instruments, which can benefit more from increases in the price of gold, but also carries more risk. For many investors, a combination of both types can provide the right balance between safety and yield.
4. Gold in Contexts of Economic Uncertainty
With geopolitical tensions and the risk of a possible recession on the horizon, investment experts believe gold has a more important role than ever. Current economic conditions are prompting many to re-evaluate their portfolios and consider greater exposure to gold.
While under normal conditions an allocation of between 14% and 20% of gold has proven to be optimal, in this environment some advisors suggest increasing that allocation to 25%. This provides greater protection against economic risks and ensures that the portfolio is better positioned to withstand the market’s turbulence.
Protect your Money
Aktagold's mission is to help people around the world to protect their money from the economic and financial instability of their countries of origin, by providing them with access to saving in physical gold, safely stored in high-security vaults in Canada, an option that used to be reserved only for the wealthiest ones.
To learn what the optimum gold allocation for your own investment portfolio is, schedule a complimentary assessment here.