The World Gold Council data shows that…26% of 2018 gold demand was for investment purposes while another 15% was demanded by central banks. Against that backdrop, there are three arguments for holding gold in a portfolio:
Benefits to Holding Gold
2. Holding gold in a portfolio can provide potential diversification benefits should a recession arise.3. Investors who wish to add an asset that offers a potential inflation hedge should consider gold.
Risk Factors to Holding Gold
1. Gold generates no cash flows, no earnings, and requires storage costs and, [as a result,] this has influenced gold’s under-performance of traditional stocks and bonds over the longer term, since dividends and coupon payments are crucial drivers of total returns for stocks and bonds.
2. …The physical supply and demand of gold is crucial idiosyncratic driver of the commodity.
- On the demand side, central bank, investor and consumer preferences for the commodity have been relatively stable overtime, but they are subject to change.
- On the supply side, an increases in mine production could also weigh on gold.
3. …Lack of inflation may reduce its attractiveness and investors may shun the asset class should the market see a strong risk-on rally.
Gold has the potential to shine in times of market and geopolitical volatility. A small allocation to gold may be suitable for investors who are looking to real assets to diversify their portfolio. However, investors should balance the sizing of their position given the lack of yield and low current inflation expectations.