In the early part of the 19th century, the Turin Papyrus Map was discovered in Egypt. Thought to have been drawn around 1160 BC, it is considered one of the earliest known geological maps because of its detailed description of rock deposits and mining information – including a gold quarry.
From early civilizations to dynasties, empires and kingdoms, this precious metal has held value for centuries – recognized as a monetary currency throughout most of the world.
So why is gold still considered valuable in this digital age of credit, debit and paper currency? And perhaps more importantly, why may it still play a role in investment portfolios?
Gold was used as a currency because it was scarce, controllable and recognizable. It has established itself as a symbol of art, spirituality and wealth – and continues to do so today. The precious metal is still a staple in jewelry and other fashion accessories.
This sentiment and personal attraction have been a driving force in the value of gold. Additionally, it has helped fuel the argument that as a hedge against market volatility, gold can play a role. But whether that is true, and what role it plays in your portfolio, is debated amongst financial experts.
For use in volatile times
When you remove sentiment from the equation, the data paints a different picture of gold. In August 2016, two economics professors from Harvard University released a study titled Gold Returns published in The Economic Journal – which examined long-term U.S. data and argued that “changes in real gold prices co-vary negligibly with growth rates of consumption and, moreover, gold has not delivered high average real returns during macroeconomic disasters.”
In other words, turning to gold during times of economic decline doesn’t necessarily provide the diversification needed to offset losses. Where it may help, though, is during a low interest rate environment as noted in our white paper Negative interest rates: implications for investors.
Why? Because since gold has no yield, it can be attractive when yields on other assets start to fall. For instance, its relationship with bond yields is typically inverse – when yields go down, gold strengthens, and vice versa. That’s why people sometimes use it as an inflation hedge.
Proponents of gold recommend having about 5% of assets in the yellow metal. History has shown that it doesn’t hold its value and, unlike stocks, has been known to be subject to lengthy periods of stagnation. So if you are going to invest in gold it should only be in very small amounts.
Whether you should hold gold or not will depend on things like risk tolerance and what you want to achieve. Speak with your professional advisors to help make the right decisions for your portfolio.