By Tom Anderson / Guest Editorial
Gold, one of the most precious of metals, has been a store of value for thousands of years. Today, I am frequently asked about holding gold and incorporating it as part of a dynamic, diversified financial portfolio.
At the moment, with gold being negative year-to-date, it is of course challenging to own. Questions with respect to gold are normal and natural, and it makes sense to raise eyebrows with its recent about-face in the last six months. They are questions to which we in The Anderson Group at Morgan Stanley have given considerable thought.
Regardless if you have a goal of preservation of capital, are moderate or are more aggressive, I believe that for some investors, gold deserves consideration to be included in an investor’s portfolio. This belief is backed up by the fact that central banks around the world hold the asset as a store of value. The average central bank holding is in fact around 15 percent, yet most investors hold a much smaller weighting than this.
As I have pointed out in other commentaries, economic issues in the United States, Europe, Japan and China are far from resolved. We feel that Japan and Europe are facing a lot of the same structural issues that the United States is facing with respect to debt and demographics. Japan and Europe are also implementing similar policy responses that can perhaps generally be characterized as trying to solve problems that were created by debt with additional debt.
At certain levels, I feel that gold becomes a very compelling alternative for central banks and investors relative to other currencies, particularly the U.S. dollar, the yen and the Euro. In theory, this could offer a form of price support. It is possible that by nature of the recent price movements combined with central bank policy, the forward looking risk, return and correlation characteristics of gold have changed relative to these major currencies.
It is also imperative to note gold’s history as a safe asset relative to other currencies over long periods of time. And of course, there is a limited supply of gold; this is not true of fiat currencies. Although it is no guarantee that it will always be the case, historically gold frequently has history on its side during crisis and extreme movements, both throughout history and across countries. For instance, during the Great Depression, gold increased in value at 68 percent, suggesting that gold can have positive portfolio benefits reacting in both inflationary and deflationary environments.
If it turns out that gold is under-owned by individuals, institutions, foundations, endowments and countries relative to financial assets (and history), it may be an attractive holding. The volume of gold traded to generate the recent sell off has been relatively small. If people decide that they want to own it, then it is possible that there could be an equal movement in the opposite direction.
Because of everything above, the world has printed more money, kicked the can further down the road and gold has moved down in price, not up. I believe that, for some investors, it may make sense to consider holding gold in their portfolios. Investors should generally like asset classes more as their price falls and less as their price rises. For some reason, people tend to do the opposite.
For more information on gold and how it operates within our three portfolios, visit www.morganstanleyfa.com/theandersongroup/.
Tom Anderson is an executive director – wealth management, senior portfolio management director, family wealth director and financial advisor with Morgan Stanley. The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley or its affiliates.