Gold as a strategic allocation

September 2021

In this paper, we evaluate the case for gold as a strategic allocation in an institutional portfolio. We start with a brief history of gold as an early form of money, its relationship to fiat currencies, and as an investment. We then address gold’s correlation with other asset classes, its relationship with inflation, real yields, the US dollar, and its role as a safe-haven asset. In addition, we briefly touch on the different manners in which an allocation to gold may be implemented.

We find that gold has provided downside support during periods of heighted volatility or increases in systemic risk. This safe haven attribute, when combined with gold’s independence from any central bank, means that gold exhibits its own unique characteristics that provide potential benefits to a diversified portfolio. While we note that gold has traditionally been considered an asset with both inflation and deflation hedging benefits, most of the major test cases for this occurred either when gold’s price was pegged to the dollar or during the collapse of the Bretton Woods system, making it difficult to rely on historical data. Still, our view is that many portfolios would benefit from having a strategic allocation to gold, particularly in a world that appears poised to experience persistently low real interest rates.