The World Gold Council (WGC) claims that investing in gold could benefit portfolios in a deflationary environment.
Often seen as a hedge against inflation, the WGC makes the claim that gold can benefit portfolios in a broader range of economic environments.
Based on research commissioned from Oxford Economics, the WGC says that gold’s share of an optimal portfolio – which includes commercial property, equities and cash – is around 5% in a base long-term economic scenario featuring 2.25% growth and 2% annual inflation. The optimal allocation rises in a more inflationary long-run scenario and also does so for more risk-averse investors in a scenario featuring weaker growth and low inflation.
The portfolio is constructed from the perspective of a UK investor in order to utilise a long run of historical asset returns data going back to 1971.
With inflationary and deflationary pressures posing problems the world over, the report – called ‘The impact of inflation and deflation on the case for gold’ – aimed to improve understanding of why gold is used as a risk management asset.
In addition, it suggests that average gold allocations are sub-optimal and that many investors could benefit from increased exposure to the precious metal.
The report also found that gold plays an important role in stabilising the value of a portfolio even if a modest negative real annual return is assumed.
©2011 funds global
