Gold as diversification for mutual funds

Large investment funds that struggle to achieve good returns should look more often at gold as an alternative to government bonds, the World Gold Council in a new report. The precious metal not only offers diversification within a well-diversified investment portfolio, but also a very interesting return.

Due to extremely low interest rates, government bonds have yielded less and less return in recent years, making investing in gold an attractive alternative. We can also see this in the increasing demand for the precious metal in emerging markets, where today more than half of all precious metals are sold.

Return of gold

One of the most well-known arguments against Buy gold is that the precious metal does not yield interest or dividends, but if we look at the price development of the past decades, the gold investor has little reason to complain. With a return of 10.6% per year since 1971, the precious metal is not inferior to bonds and shares.

If we look at the results of the last twenty and last ten years, gold is not inferior to other investments. The yellow metal provided a better return than bonds, without sacrificing liquidity.

Gold returns are not inferior to stocks and bonds (Source: World Gold Council)

Gold in the investment portfolio

According to calculations by the World Gold Council, institutional investors and so-called sovereign wealth funds achieve the optimal mix between risk and return when they hold between five and ten percent of their assets in physical gold. That's significantly more than what most mutual funds hold in their portfolios of precious metals today.

Central banks in emerging markets are increasingly adding gold to their reserves as an effective form of diversification, as it provides protection against currency risk and political risk. In addition, emerging markets are buying more and more gold due to an increase in disposable income, a trend that is unlikely to change in the coming years. This makes gold also interesting for institutional investment funds to achieve their objective, according to the World Gold Council.

Gold vs Currency (Source: World Gold Council)