Gold: The Original Liquid Alternative

By: Maxwell Gold, CFA, Head of Gold Strategy & Diego Andrade, Senior Gold Strategist

  • Uncertainty surrounding market valuations and global macro risks in stocks and bonds emphasizes the importance of portfolio diversification.
  • Adding liquid alternative asset classes may help investors mitigate risk, but gold has historically shown it may serve portfolios more effectively.

A lot can change in a year. As global economies begin to reopen in response to wider vaccine distribution, risk assets continue to take center stage among many investor discussions. However, amid this continued bullish sentiment lies a backdrop of certain rising risks — namely, stretched equity market valuations and bond yields remaining below inflation, which have created a potential asymmetrical return profile.

These factors emphasize the importance of diversification, a trait that gold — the original liquid alternative — has historically provided. Gold is one of the oldest financial instruments, dating back thousands of years, and may offer unique risk mitigation and diversification characteristics for portfolios compared to other liquid alternatives.

Following a strong 2020, with gold reaching an all-time high of US$2,067/oz last summer,1 gold performance has remained subdued year to date, as shown below. Some have claimed that other liquid alternatives which have outperformed recently, or even cryptocurrencies such as Bitcoin, should replace gold’s role in portfolios as the preferred diversifier and potential portfolio hedge.

Adding liquid alternative asset classes such as real estate investment trusts (REITs), natural resources, global infrastructure, liquid hedge strategies or broad commodities may potentially help investors mitigate risk in a traditional 60/40 portfolio. But gold, the original liquid alternative, has historically shown it may serve portfolios more effectively.

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Footnotes

1Bloomberg Financial L.P., and State Street Global Advisors. Gold reached all-time high in US-dollar terms on August 6, 2020.

Glossary

Basis Point (bps)
A unit of measure for interest rates, investment performance, pricing of investment services and other percentages in finance. One basis point is equal to one-hundredth of 1 percent, or 0.01%.

Bloomberg Barclays Global Aggregate Bond Index
A benchmark that provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the US Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment-grade 144A securities.

FTSE NAREIT All Equity REITS Total Return Index
The index is a free-float-adjusted market capitalization-weighted index that includes all tax-qualified REITs listed in the NYSE, AMEX, and NASDAQ National Market.

HFRX Global Hedge Fund Index
The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies, including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry.

MSCI All Country World Index
Captures large and mid cap representation across 23 Developed Markets (DM) and 26 Emerging Markets (EM) countries. With 3,050 constituents, the index covers approximately 85% of the global investable equity opportunity set.

S&P GSCI Total Return Index
The S&P GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. The index is calculated primarily on a world production-weighted basis comprised of the principal physical commodities futures contracts.

Spot Gold Price
The price in spot markets for gold. In US dollar terms, spot gold is referred to with the symbol “XAU,” which refers to the price of one troy ounce of gold in USD terms.

S&P Global Infrastructure Net Total Return Index
The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities.

S&P Global Natural Resources Total Return Index
The index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across 3 primary commodity-related sectors: Agribusiness, Energy, and Metals & Mining.

S&P 500® Index
The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Originally Posted on July 7, 2021 – Gold: The Original Liquid Alternative

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