Most people have strong opinions about gold. You either like the idea of ​​owning gold or you reject the precious metal. Including gold in a portfolio can have a positive impact on risk-adjusted returns.

Here are 4 points from ChatGPT that explain why gold can have a positive impact on a portfolio:

1. Diversification

Gold has historically had a low correlation with traditional assets such as stocks and bonds. This means that when stock markets are volatile or falling, the price of gold tends to remain stable or even rise. By including gold in a portfolio, an investor can reduce the overall risk (volatility) of the portfolio, which can improve risk-adjusted returns.

2. Protection against inflation

Gold is often considered a store of value asset and a hedge against inflation. During periods of high inflation, the price of gold can rise, which can help offset losses in other parts of the portfolio that are negatively affected by inflation.

3. Crisis and uncertainty protection

Gold often acts as a “safe haven” during economic and geopolitical crises. When uncertainty increases in the markets, investors often seek protection in gold, which can lead to rising gold prices. This protection against uncertainty can improve the overall stability and risk-adjusted returns of the portfolio.

4. Historic achievement

Gold has proven itself over time to be a valuable asset to include in a diversified portfolio. While gold does not always provide a high absolute return, its contribution to risk-adjusted returns can be significant, especially when markets are volatile or falling.

Sharpe ratio

Risk-adjusted return is often measured using the Sharpe ratio, which is calculated as the average return in excess of the risk-free rate divided by the standard deviation (volatility) of the return. By reducing portfolio volatility and potentially increasing returns during times of market turbulence, gold can contribute to a higher Sharpe ratio for the portfolio.

Empirical studies

Several empirical studies and academic articles have shown that a small allocation of gold (e.g. 5-10%) in a diversified portfolio can improve risk-adjusted returns. These studies show that gold can help reduce the portfolio's overall risk and improve its return profile under different market conditions.

How has it worked over the last 10 years?

Let's simulate a portfolio with 50% stocks (XACT Sweden) and 50% gold (XETRA Gold ETC). We rebalance once a quarter.

When we backtest this strategy, we clearly see that it has provided a better risk-adjusted return than just holding 100% stocks. This is because diversification has cushioned the downturns.

During major stock market declines, the portfolio has often fallen by half as much. This has led to less stress and a lower likelihood of being forced to sell at the wrong time or making bad decisions due to fear.

We don't know what will happen in the future, but there is always reason to look for markets that have the potential to increase risk-adjusted returns.

Global asset allocation

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