Investors are being tested. Equities have declined significantly for the year and 2022 has just begun. High-risk speculative assets like Crypto have performed even worse.
Meanwhile, inflation threatens the “sideline” money that investors hold, as they wait to see how far the market will go. There seems to be less room for investment due to rising interest rates. For the most part the goal has shifted from earning a decent return only to saving capital or minimizing losses. This cold start to the year has left many investors worried about what they will do in the next 11 months. Many are asking if gold can balance some of the new risks that have crept into so many portfolios.
An analysis by the World Gold Council gives some answers.
Their study concludes that “adding 4% and 15% of gold to the projected average portfolio over the last decade will increase risk-adjusted income, depending on structure and region.”
The same report shows how many structural changes have increased the effectiveness of gold in recent decades. For example, the growth of emerging markets – as seen in India and China – has expanded the group of people who are able to buy gold. In addition, rising central bank demand has boosted gold performance as more countries rely on their reserve metals. Finally, the global financial crisis has warned more investors about the importance of gold as a strategic asset to offset risk.
These advantages can make one wonder why gold has not become the mainstay of the retail investor portfolio. The answer may be mania surrounding equities in recent years.
2015, 2017, 2019, and 2020 large cap growth stocks were the highest performing asset class. This pattern has attracted millions of investors. Problem: The song is off.
Although 2022 is still young, it is unlikely that growth will continue to be high. Evaluation remains high. Against the backdrop of the supply chain challenge, more profits will be needed to meet this expectation.
At the same time, the upswing around technology stocks has slowed as recent earnings reports have been disappointing. This low performance is a cause for concern because many growth indexes, such as the S&P 500, are supported by some technical heavyweights. The five highest performing stocks have largely outperformed everyone else on the index. Those top five have returned 25.6% annually in the last five years. The other 495 stocks returned an annual return of 6.5% over the same period. Most of these five stocks are found in the FAANG group of Facebook, Amazon, Apple, Netflix and Google.
Gold offers a degree of diversity that is disappearing from the indicators. Consider that over the last half-century, “gold prices have risen by an average of about 11% in US dollars since 1971,” according to a study by the World Gold Council. In the last five years, gold has surpassed commodities, cash, US bonds, hedge funds and global bonds.
Signs early next year have given investors reason to reconsider their strategy and consider gold.
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