Boosting your Equity Portfolio with Gold – Case Study by DGC Asset Management

Why invest in gold?

To the frustration of money market investors, today’s low growth environment significantly dampens returns on equities. For this reason, many are turning to alternative asset classes in order to combat record-low interest rates and soaring rates of inflation. Amongst these alternative investments, gold has long been heralded as a star performer.

Because gold behaves very differently to equities, it has a strong track record as an effective hedge against inflation. In fact, inflation often has a positive effect on gold prices as manufacturers’ costs are pushed up. Over the past decade, one troy ounce of gold climbed in value from $280 to $1,650, and the future looks bright: a survey carried out by Forbes earlier this month (April 2013) revealed that over 65% of participants were bullish regarding the precious metal.

Like all finite resources produced in small quantities, gold will always find a willing buyer. In fact, when investors jaded with the stock exchange scramble to acquire real assets (i.e. tangible entities with intrinsic value), the value of gold is driven even higher. Little surprise, then, that in recent years we have seen a wave of gold buying companies hoping to cash in on broken and unwanted jewellery.

There are various ways to invest in gold, whether in coins and rounds, gold bars, company shares or Exchange Traded Funds; for a full breakdown of each option, read this article.

Diversifying your portfolio with gold

A recent case study by DGC Asset Management showed that a £100,000 portfolio exposed only to developed market (DM) equities, equally weighted between the FTSE All Share Index and S&P 500 Index, delivered a nominal compound annual growth rate (CAGR) of just 0.2% between 2000 and 2013. When the portfolio value is adjusted for inflation, this actually tips over into a real annual loss of -2.7%, or a loss of £29,896.78 (29.9%) in real terms.

Fortunately for investors, research shows a direct correlation between gold investment and the overall performance of a portfolio. In the case study above, diversifying an equity portfolio by as little as 20% gold bullion was enough to beat inflation and deliver a modest return of 0.4%, or £4,924.93 in real terms.

At a weighting of 30% gold bullion to 70% equities, the portfolio delivered a nominal annual growth of 4.9%, and a real return of 1.9%. This portfolio would now be worth around 81% more in real terms (inflation adjusted) than the straight equity portfolio.

Real assets, real returns 

The trend we are seeing with gold is mirrored across other real asset classes. A recent report on real assets showed that, over the past decade, investments in UK Farmland have returned 10%, UK Forestry 10.4% and Fine Wine 11.7%, each outpacing FTSE 100, which trailed behind with returns of 0.7%. Nevertheless, these real asset classes could not compete with gold returns of 18.7% over the same period.

Overall, research suggests that diversifying with gold allows you to fortify your portfolio against tough investment conditions. An investment of just 20% gold is enough to nudge losses into returns.

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