There we go again: A golden combination
Gold is a must-have if diversification is your thing, which it should be.
Hi all,
Below, you will find my latest analysis for the Blokland Smart Multi-Asset Fund on the impressive diversification benefits a combination of equities and gold offers. Expect much more to come!
The combination of stocks and gold in an investment portfolio remains very attractive. With quality stocks, you benefit from the profitability of unique, scarce companies. Since these companies often have significant pricing power, stocks also offer partial protection against inflation. Gold does the same and acts as insurance against adverse conditions, such as geopolitical tensions. In recent years, the role of gold as insurance protection has grown significantly as governments and central banks continue to issue vast amounts of debt and (new) money. Gold offers a scarce alternative to ongoing currency devaluation.
Gold Delivers in April
Gold and stocks also work well together in a diversified investment portfolio. This was confirmed again in April. After five months of sharply rising prices, stocks had to pause last month. Rising tensions between Iran and Israel and disappointing inflation figures—which prevent the Federal Reserve from lowering interest rates—pushed the stock market down by more than 2%. However, this shift in market sentiment led to another 'super month' for gold, which increased in value by 5%.
The 20 Worst Months
The April returns are a good opportunity to examine the diversifying effect of gold and stocks again. The chart below shows the 20 worst stock months since 2008. I often use 2008 as the starting point for my analysis because the Great Financial Crisis is the direct cause of debts increasing so exorbitantly over the past 15 years. The large amount of regulation imposed after the crisis meant there was much less leverage. But because the whole world revolves around (economic) growth, a new magic formula had to be found to achieve that growth: debt.
The chart shows that gold often increases in value when stock prices plummet. On average, stocks fell 7.3% in the 20 worst months since 2008. That is pretty ugly. However, the price of gold rose by an average of 2.1% in those months. In 15 of the 20 months, the price of gold increased. In other words, in 75% of the cases. With gold, you could have significantly limited losses. As you may already know, loss limitation is one of the core characteristics of the Blokland Smart Multi-Asset Fund.
Limiting Losses is Crucial
Now, it does matter how much gold you have in your portfolio. Research shows that most investors have no gold in their portfolio at all, and if they do, the weights are often low. In the Blokland Smart Multi-Asset Fund, along with 55% stocks, 25% of the portfolio is invested in gold. The chart below shows what such a substantial allocation to gold does when stocks crumble. The chart displays the loss limitation in percentage points for a portfolio comprising 69% stocks and 31% gold compared to a portfolio with only stocks. Where do these numbers come from? For this analysis, I leave the other investments (Bitcoin) out of consideration— then the ratio of stocks is 55%/(55%+25%) = 69% and of gold is 25%/(55%+25%) = 31%.
Substantially Less Downside Risk!
Back to the chart. December 2022 is the most recent of the 20 worst stock months since 2008. Stocks dropped by 6.2%, but gold rose nearly 1% that month. Based on the weights mentioned above, adding gold would have limited the loss by 2.2% (see chart). That is significant. But just as importantly, except for one, all the bars in the chart are positive. In other words, an investment in gold limited the loss in 19 of the 20 worst months for stocks since 2008. That's a 'hit ratio' of 95%. The conclusion from the above charts is simple. Gold almost always ensures that losses are limited when stock markets fall significantly. Apart from the attractive properties of gold described above, it would be a shame not to take advantage of such strong diversification benefits.