A benchmark portfolio with an 8.5% allocation to gold suffered 5% lower losses during the financial crisis than one not holding gold, research published by the World Gold Council (WGC) suggests.
In its latest report, Gold: Hedging Against Tail Risk, the WGC claimed a modest, consistent holding of gold mitigates the potential for significant loss of value during extreme market events.
WGC argued that during the period between October 2007 and March 2009-the height of the global financial meltdown-an investor with a portfolio of $10m experienced an additional $500,000 financial loss simply by not maintaining a position in gold.
The study used a composition similar to a benchmark portfolio, which included an 8.5% allocation to gold, to show that total losses incurred during the period reduced by 5% relative to an equivalent portfolio without gold.
In 18 of the 24 tail risk scenarios analysed by the WGC, portfolios which included gold outperformed those which did not. The term "tail risk" refers to extreme events that may be considered unlikely, such as the "Black Monday" market crash of October 1987, but which tend to have a considerably negative effect on an investor's capital when they do occur.
WGC investment research manager and author of the research Juan Carlos Artigas said: "In previous studies, the WGC has shown gold to be a highly effective and consistent portfolio diversifier. We can now demonstrate that gold does not only help increase expected risk-adjusted returns, it can also considerably mitigate the potential for wealth to be eroded by extreme events.
"In the last decade we have seen two of the worst bear markets in the last hundred years. As one might expect, sensitivity to risk still runs high for investors around the world, and as assets are rebuilt an ability to protect capital irrespective of market conditions is paramount.
"Considering portfolio diversification is clearly important, but protecting against systemic risk can be an entirely separate matter. This research shows that gold protects against tail risk events, but equally in more positive times reduces the volatility of a portfolio without sacrificing expected returns."
Here are key takeaways from our 2019 Asset Allocation Outlook on how we are positioning asset allocation portfolios in light of our outlook for the global economy and markets.
This week's top stories included a Freedom of Information request revealing more than 100,000 savers could face six-figure tax bills as a result of GMP equalisation.
The Pearson Pension Plan has entered into a £500m pensioner buy-in with Legal & General (L&G) in the insurer's first deal of 2019.