Gold as a Source of Capital Preservation

Gold hedges against extreme inflation situations such as deflation and hyperinflation. Investors with an average risk profile can benefit.

Gold hedges against extreme inflation situations such as deflation and hyperinflation. Independent analysis from Oxford Economics shows that investors with an average risk profile can benefit from adding a gold allocation of around 5% to their long-term portfolio. Gold’s optimal share in an average risk portfolio rises in a scenario with higher inflation and is also seen to rise for low risk investors in a lower growth and lower inflation environment.

The optimal allocation of assets in a multi-asset portfolio depends on the aim of the investor, the nature and duration of their liabilities, and the degree of risk that the investor is prepared to take. Lower risk investors place more emphasis on reducing the riskiness of their overall portfolio and allocate investment to assets such that portfolio returns are less volatile.

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Consequently, the table below illustrates that investors with a lower risk tolerance will be attracted to assets whose returns are negatively correlated with other assets, such as gold, as the diversification decreases portfolio volatility. Higher risk portfolios place more of an emphasis on boosting returns and will allocate investment in line with higher absolute returns at the expense of the lower volatility generated through diversification.

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