Experts

Gold and banking crisis - why hold gold in portfolios?

Gold is so difficult to grasp that most economists have been unable to model its behaviour with satisfactory results. However, despite its apparent unpredictable moves, gold has been astonishingly consistent across history in outperforming during periods of banking crises.

Date: Dec 1, 2011          Author: Paul Marson

Keywords: Gold, Asset allocation, Portfolio construction

Gold is so difficult to grasp that most economists have been unable to model its behaviour with satisfactory results. However, despite its apparent unpredictable moves, gold has been astonishingly consistent across history in outperforming during periods of banking crises.

Starting in February 1920 until today – a period covering almost 92 years of data – gold’s real price has increased by 622%, or 2.2% per annum in real terms.

This time-span has witnessed five true global banking crises: the Great Depression in 1929; the Secondary Banking crisis in the UK in the 1970s; the US Savings and Loans crisis in the late 1980s; the collapse of LTCM and Russian Financial crisis in 1998; and finally the sub-prime mortgage crisis since 2007 followed by the ongoing global banking crisis.

The average annualised real gold returns during these five major crises has been an impressive 21%. In only one instance, LTCM, were gold’s returns negative, losing -1.5% in annualised real terms.

In the four other instances, gold gained at least 18% per annum, reaching as much as 48% in annualized real terms during the 1970s crisis in the UK.

History, as far back as we can go, tells us one thing: gold is a good asset to hold in times of global banking crisis or systemic collapse of financial systems. It thus seems that gold should be the perfect asset class to hedge against today’s lingering concerns over the stability of our globalised and inter-linked financial systems.

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