Portfolio Theory Makes Case for Gold Hard to Ignore

The case for investing in gold today is as strong as it was during any tumultuous period in history.

portfolio theory case for gold

As Seeking Alpha’s Logan Kane notes, gold boasts perhaps the most diverse palette of investors out of any asset. Although some traders swear by other, riskier assets, Kane says it’s hard to ignore the case for gold as an ultra-reliable choice.

Since 1968, the metal has returned an average of 7.1% each year. It has also handily beaten the dollar since President Nixon abolished the gold standard, with the greenback losing 98% of its value against gold. On first glance, the global geopolitical landscape of today seems to be far removed from the strife-ridden 1930s, 1940s and 1970s, when gold was also a prominent investment.

Yet Kane points out that appearances can be deceiving. He writes that, while the most advanced countries of the world have, for the most part, managed to hold onto peace and prosperity, emerging markets are a constant powder keg which threatens to spill over to the rest of the world.

In calmer times, some investors insist on moving into riskier assets like stocks or even bonds in pursuit of profit. But as Kane points out, investing in such assets subjects one to currency devaluation regardless of the landscape. Moreover, data shows that gold has beaten stocks on a price-appreciation basis since 2004, putting into question the idea that equities are a more lucrative bet.

Investors such as Ray Dalio have demonstrated that investing in gold during periods of higher interest rates can provide incredible returns. Further analysis shows that gold’s returns are much more reliable compared to stocks, appreciating in a methodical upwards fashion as opposed to downside crashes found in equities.

According to the article, the case for investing in the metal today is as strong as it was during any tumultuous period in history. The metal’s purpose is to protect investors from the ever-present volatility, offer unparalleled diversification to any type of portfolio and shield them from inflation.

Contrary to the 5% allocation to gold that some money managers preach, an analysis of portfolios over the past decade showed that gold enjoys far more favor among investors, with some allocating up to 14% to it. In times of peace, the metal provides a very reliable 5% annual return with massive potential for gains should the world stage turn sour.

Kane is also critical of the view that gold is a niche investment appealing to a narrow range of investors. Extremely wealthy individuals and central banks swear by gold to hedge their bets, and the latter remain the strongest buyers of gold with hundreds of tons of bullion acquired every year.

Those who ignore gold’s role in a portfolio and instead focus fully on stocks and bonds have been known to suffer severe losses when these assets take a dive, reports the article. Conversely, investors like Dalio show that faith to the metal and an understanding of commodity dynamics can return more profit than any risk-oriented investment strategy, all the while giving peace of mind to investors should another recession or conflict take center stage.