Gold and Its Place in an Investment Portfolio

Gold is back in fashion as inflation runs hot in advanced economies. If central banks struggled in the past to bring inflation to their target, that is no longer the case.

The price of gold jumped above $1,825 last Friday in response to the much weaker than expected NFP (nonfarm payrolls) report. The U.S. economy created only one-third of the jobs the market expected in August, struggling to recover.

Because the Federal Reserve of the United States has a dual mandate (i.e., price stability and jobs creation), the report delayed the possible tapering announcement from September to November. Yet, inflation is running hot, way above the Fed’s average inflation target of 2%.

Therefore, the likelihood that accommodative measures are kept in place despite rising inflation has pushed gold higher. This should be no news because, in the last 20 years, investors that allocated 10% of their portfolios to gold had improved risk-adjusted returns.

Why Invest in Gold?

Forex brokers have introduced commodities in their offerings for years now.  Investors have the option of adding gold to their investments using the same account – thus, gold becomes interesting from a long-term perspective.

Gold continues to be interesting from a commodity investment because of its characteristics. Firstly, it has lower volatility than most other commodities. This brings stability to the long-term investment portfolio.

Another aspect is that it is highly liquid. The ability to transform investment into cash as quickly as possible in time of need is valued by investors.

Also, gold is a proven way of storing value. Over multiple time horizons, it delivered superior absolute and risk-adjusted returns.

In recent months, the price of gold declined from the record-high levels set in August 2020. Yet, the yellow metal remains attractive both in periods of low and high inflation. It outperformed other commodities in periods with low inflation – will it do the same in periods with rising inflation?