Independent analysis by Oxford Economics suggests that gold's share of an optimal portfolio is around 5 per cent in a base long-term economic scenario featuring 2.25 per cent growth and 2 per cent annual inflation. The optimal allocation rises in a more inflationary long-run scenario and also does so for more risk-averse investors in a scenario featuring weaker growth and low inflation.
The World Gold Council commissioned a study entitled ‘The impact of inflation and deflation on the case for gold'. Marcus Grubb, Managing Director of Investment, World Gold Council, said the research came at a time when high inflation was an ongoing reality for many developing economies, while Western economies were facing the threat of protracted low growth, low inflation or even deflation. “In this context, we wanted to understand why gold is being reconsidered as a risk management asset, particularly if one of the many divergent inflation scenarios came to pass,” he said.
Mr. Marcus Grubb said the study had suggested that typical investor allocations to gold were sub-optimal. “The vast majority of investors still have little or no allocation to gold, which places significant capital at risk, ” he said.
The report uses the proprietary Oxford Economics global model to examine gold's performance relative to other assets under a range of inflation scenarios. It also examines the investment case for gold within a portfolio under different long-term economic conditions.
Key findings of the report are: Gold performs relatively well compared to other assets in a high inflation scenario as well as in a deflationary period. Due to its lack of correlation with other assets gold has an useful part to play in stabilising the value of a long-run portfolio even if a modest negative real annual return is assumed. According to Jens Tholstrup, Managing Director, U.K. of Oxford Economics, because of its lack of correlation with other financial assets, the report had shown that gold has an important role to play in stabilising the value of a portfolio, even where the conservative assumption of a modest negative real return is made.
