A precious metals allocation of 10 to 20% in the portfolio is recommended.
By Dani Stüssi | First published abridged in the September issue of “FINANZ und WIRTSCHAFT
Funds for long-term retirement planning should maintain purchasing power and benefit from compound interest. But how should you invest your savings in the long term in times of zero or negative interest rates and record highs in the stock and real estate markets? Even in today’s environment, gold plays an important role in a portfolio as it provides stability and long-term value preservation.
Is gold a bond substitute? The short answer is “no, but…”. Gold does not yield interest and fluctuates in value much more than bonds. Only recently, the gold price experienced a “flash crash” of minus 4.4% within minutes. The gold price is strongly dependent on real interest rates and the U.S. dollar. Therefore, the precious metal is not a pure bond substitute for conservative investors. But a 10-20% gold allocation in the portfolio is still recommended. The precious metal has a low correlation with the stock market, i.e. the price of gold doesn’t dependent on the performance of the stock market. A good investor ensures good diversification in his portfolio and invests in different asset classes, which would ideally balance each other out in wild markets. The value of gold has increased with the rising money supply and has even significantly outperformed the S&P 500 stock index since 2000 (see chart).
Confidence in gold as a store of value in times of crisis
Gold has a much more important property, which is in greater demand again in today’s world. It has been an accepted medium of exchange for centuries and is trusted worldwide as a safe asset in times of crisis. This trust is seemingly in our DNA, as gold has been used in jewelry and as a means of payment for centuries. Moreover, the yellow metal is a scarce commodity. In 2020, approximately 3,400 tons of gold were mined worldwide. If all the existing gold in the world were melted together, experts estimate, it would fill a swimming pool just 21 meters in length, width and depth.
Separation of the financial system from the real economy
For a long time, state currencies were backed by gold. On August 15, 1971, the last link between the U.S. dollar and gold was severed, completely dematerializing the global monetary system. Since then, no national currency has been backed by a scarce asset. Central banks can create new money without any restrictions and are making increasing use of this capability. Globally, the money supply was extremely expanded last year due to the Covid-19 pandemic. At the end of 2020, for example, there was about 25% more U.S. dollars than at the beginning of the year. The more units of a state currency there are, the less each unit is worth. As a result, the dollar has been devalued by about 85% and the CHF by about 65% in terms of purchasing power over the past 50 years. Savers are the biggest losers because of this loss of purchasing power. As a scarce commodity, gold has an important role to play in maintaining value over the long term.
Gold has a low correlation to the real economy
The precious metal has often proven its worth in the past as a hedge against economic and political upheavals and is offers reliable protection against inflation and financial crises. This is why at our investment company RealUnit Schweiz AG, we also rely on gold, which is currently the largest position in our portfolio, with a 24% allocation. Our investors are looking for long-term stability and increased resistance to crises. The RealUnit is backed by performance-oriented and tangible real assets, the majority of which are held securely outside the banking system. Since gold does not yield a return and has a low correlation to the real economy, around 40% of our portfolio is also invested in listed companies with a healthy balance sheet and a sustainable dividend policy. In our opinion, diversification into different real assets is crucial for savers and investors to maintain the purchasing power of their money over the long term. Gold plays a decisive role as a proven “crisis insurance”.
More blog posts about gold: Invest in gold and secure your assets
About the Author:
Dani Stüssi is CEO of RealUnit Switzerland AG. He was a branch manager at NAB for six years and has advised investment clients there as a Certified Wealth Manager Advisor since 2007.
Image source gold bar: f9photos – Envato Elements