On January 18th, we initiated a gold position in many of our portfolios. As many of you know we are not flashy day traders. On the contrary, our investment approach has a long term outlook, is disciplined, and is built on the fundamentals of asset allocation. With that being said, we do not take a purely static approach to investing. We believe that adjustments over time are prudent and this change represents what we believe to be a prudent investment.
So why did we buy gold?
First, I should note that we look at gold or other commodities as a piece of the asset allocation puzzle and when we utilize these tools we take a measured approach. For the portfolios that implemented the gold position, the percentage was 4-5%.
There are two primary reasons for this position.
Gold as an equity hedge
Traditionally, gold has served as a good hedge against equity (stock) downturns. The broader stock market is coming off a phenomenal 2020 despite the coronavirus crash. Additionally, the market had a great run in 2019, and although we are not calling for a crash, it does appear that the market is rather expensive. If the market continues to rise, that is great, and we certainly hope for that. However, should we experience a large drawdown, gold can serve as an offset. As you can see from the chart below, gold does relatively well when stocks go down by greater than 15%.
Gold as an inflation hedge
Gold is a finite resource with a demand that fluctuates. As demand rises for a finite asset, the price of that asset inevitably rises. One of the sources of demand for gold is central banks such as The Federal Reserve and European Central Bank. These central banks buy gold as they print money. Currently, central banks across the world are increasing the money supply as they attempt to help economies recover from the economic crisis produced by the pandemic. Therefore, in addition to serving as a price inflation hedge, gold may also help against monetary inflation (currency devaluation). The chart below shows you that when inflation rises, gold performs well.
As we move through 2021, we will continue to provide timely market updates, articles, and videos. As always, if you have any questions or concerns please feel free to reach out to your FSG advisor or support team. Additionally, we are always interested to hear your feedback. Would you like more updates like this? Is this type of information technical or just right? Until we meet again!
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Written by: Brice Carter