Gold, is considered by many, to be a hard asset that can be used as a long-term investment vehicle and will help you avoid the rapid devaluation of your portfolio during times of market turbulence. Gold is looked at by many as a safe haven asset, that will hold up its value when paper assets become less favorable. We analyzed several portfolios that included stocks, bonds and gold, over the past 30-years, to find an efficient portfolio allocation of gold that out-performed during markets crisis.
The table below provides the returns of several portfolio over the course of 4-specific periods that experienced market turbulence. In each of these periods, the performance of a portfolio that contained stock, bonds and gold were compared to a portfolio that only held stocks and bonds. The goal was to see if a portfolio that contain exposure to gold would outperform during tumultuous market conditions.
The S&P 500 index was used to calculate the portfolio’s equity returns. Dividends were not included in this calculation. The 30-year treasury bond futures contract was used to determine the portfolio's bond return. Coupon were not included in this calculation. The London Interbank PM fixing for gold bullion was used to determine portfolio’s gold returns.
The table reflect the returns of a portfolio that was 60% equities, 40% bonds. These returns were compared to a portfolio that was 57% equities, 38% bonds and 5% gold. Additionally, a third portfolio was constructed that was 54% equities, 36% bonds and 10% gold. The last portfolio contained 45% equities, 30% bonds, and 25% gold.
The results show during the 1987 stock market crash, the 2002-2003 recession following the 9/11 attacks, and the bear market formed during the “Great Recession” from 2008-2010, a portfolio of 25% gold outperformed the other 3-portfolios. Additionally, the table shows that returns of all 4-portfolios during the period 1997-2006 and 2007-2016. During both 10-year periods, portfolios that contained gold outperformed a portfolio that only held stocks and bonds.
The chart above shows the same data that is reflected on the table where a portfolio of stocks, bonds and gold, with an allocation of 45%/30%/25%, outperformed the other 3-portfolios.
The chart above shows the period from 2002-2003, following the 9/11 terrorist attacks on the World Trade Center. Over this two you period, a portfolio that contains 45% stocks, 30% bonds and 25% gold outperformed the other 3-portfolios. This portfolio with 25% gold, outperformed a portfolio of only stocks and bonds in a 60%/40% ratio, by 13.65% during this 2-year period.
The chart above shows that performance of the 4-portfolios in the aftermath of the U.S. financial crisis, which lead to the “Great Recession”. Here again, a portfolio that contained 45% equities, 30% bonds and 25% gold, outperformed the other 3-portfolios. Additionally, the best performing portfolio outperformed the portfolio that only contain stocks and bonds in a 60%/40% ratio, by 17.88%.
One of the benefits of adding gold to your portfolio is that since it is a non-financial asset class, like stocks and bonds, the performance is not correlated to the movements of stocks and bonds. This provides a portfolio affect, where the movements are smoothed, helping to eliminate some of the shocks that are experienced by stocks when riskier assets begin to become volatile. In fact, the average correlation between gold and the S&P 500 index over the past 10-years is approximately 10%. This means that on average, only 10% of the time do the changes in gold correspond to changes in the S&P 500 index. While there are times when the correlation is as high as 75% and as low at -75%, most of the time these assets classes beat to their own drummer.