As a highly liquid yet scarce asset, gold can mean increased returns and reduced volatility for investors.
In a new report, the World Gold Council suggests that the current economic climate has given investors a renewed focus on effective risk management, leading them to embrace alternatives to traditional assets.

Many investors are being drawn to the yellow metal for its role as a portfolio diversifier and long-term returns. The specific role that gold plays can be broken down in four ways, all of which are outlined below.

1. Gold is a source of long-term returns

• Since 1971, the price of gold has risen by an average of 10 percent per year
• Its long-term returns are comparable to stocks and higher than bonds
• Gold trades in a large and liquid market, yet it is scarce
• Expansion of wealth is one of the most important drivers of gold demand over the long run. It has had a positive effect on jewelry, technology and bar and coin demand — the latter in the form of long-term savings

2. Gold is a diversifier that can mitigate losses in times of market stress

• Central banks see the yellow metal as a means of diversifying their expanding foreign reserves
• It has a low correlation to most mainstream assets
• Correlations tend to increase as market uncertainty and volatility rises
• Gold is a hedge against systemic risk and strong market pullbacks
• It protects investors against extreme inflation

3. Gold is a liquid asset with no credit risk that has outperformed fiat currencies

• Gold-backed ETFs offer an additional source of liquidity, with the largest US-listed fund trading an average of US$1.2 billion per day
• The metal outperforms all major currencies as a means of exchange
• Gold has changed little over time — growing less than 2 percent per year through mine production for the past two decades
• In contrast, fiat money can be printed in unlimited quantities to support monetary policies

4. A means to enhance overall portfolio performance:

• Over the past decade, the average US pension fund would have benefitted from having gold in its portfolio
• Adding 2 to 10 percent in gold would have both increased returns and reduced volatility, resulting in higher risk-adjusted returns

Overall, the report shows that gold continues to prove its staying power, as well as its status as a safe haven for investors. Gold can enhance and diversify a portfolio, while being able to compete in an ever-changing market.
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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.