Time To Replace Bonds With Gold In Your Portfolio?

November 11, 2019

Recently, the WCG published a fresh Investment Update entitled It may be time to replace bonds with gold. Is it?

According to the report, investors are now facing the environment with flat to inverted yield curves, stock valuations at extreme levels that historically preceded meaningful stock sell-offs, and an increasing set of geopolitical concerns, including trade tensions, Brexit and Middle East turmoil. Given this backdrop, gold should be part of each investment portfolio as a sage-haven asset.

However, the WGC claims that gold has an even greater role to play today. This is because the central banks have shifted to a new regime of easy monetary policy, thus reducing expected bond returns. The point is that with negative yielding debt at all-time highs, gold may become a more attractive portfolio diversifier.

After all, the opportunity costs of holding gold have declined recently thanks to the central banks’ dovish shift and ultra-low bond yields. Normally, the fact that gold does not pay any interest or dividends can deter investors, but in a crazy world of negative interest rates totaling more than $17 trillion (that’s about 30 percent of all investment-grade securities bearing sub-zero yields), the opportunity costs of holding gold have decreased substantially or even transformed into competitive advantage.

Hence, it seems that replacing some bonds with gold could be reasonable, especially since that the yellow metal has historically performed well in the year following a dovish U-turn in the Fed’s stance, and it also performed exceptionally well when real interest rates were negative or just close to zero.

An analysis based on historical returns, when interest rates were at more normal levels, suggests that gold should amount to 2-10 percent of the investment portfolio, depending on the particular asset composition and the risk taken. But adjusting the model for lower expected returns for bonds in a low interest rate environment we face today, the optimal gold allocations increases by an additional 1-1.5 percentage point to 3-11.5 percent of the investment portfolio.

OK, would you like to know what I think about the WGC’s newest investment update, and whether it makes sense? If so, I encourage you to read the full version of today’s Fundamental Gold Report, which assesses and develops the WGC’s research. In order to receive the following (posted bi-weekly) analyses and stay informed on all things fundamentally golden, please subscribe now on our website. Right now the first 3 weeks of subscription are for mere $9 – we encourage you to catch the discount while it’s still available.

Arkadiusz Sieron, PhD
Sunshine Profits – Effective Investments through Diligence and Care

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

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Arkadiusz Sieroń is the author of Sunshine Profits’ monthly gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.

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A medical study in France during the early twentieth century suggests that gold is an effective treatment for rheumatoid arthritis.

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