Merryn's Blog

Want to hedge against extreme events? Hold gold

It is always a good idea to hold at least some gold in your portfolio. And in these tough economic times, there is no better investment to protect your assets.

Should you still be buying gold? Regular readers will know our answer to that is yes. But a new bit of research from Oxford Economics remakes the case nicely by looking specifically at the effect of UK investors holding gold in a portfolio.

You can access the full report at www.gold.org. But the upshot of the research is to confirm that, for us, holding gold pretty much always makes sense.

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In relatively normal circumstances, says Oxford Econonics- ie when inflation is around 2% and growth is around 2.25% - it makes sense to have around 5% of your portfolio in gold. That's largely because it is mostly uncorrelated with other assets and so acts as something of a portfolio "stabiliser".

But gold's "optimal share" in a portfolio rises under two circumstances. The first is when there is a risk that long-run inflation will be high, and the second is when there will be a period of low growth and low inflation. So both in times of inflation and in times of deflation/disinflation.

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That should make it particularly useful today, given that we are living with simultaneous deflation (credit is crunched, wages are falling and house prices are still falling) and fast-rising consumer price inflation (4.2% might look lower than 4.5% but it still represents a very high overall level of price rises).

Finally, the report notes that gold works well as a "hedge against extreme events". And with some understatement, given what is going on in Europe, the US and the Middle East, concludes that this "may be especially valuable given the considerable uncertainties still facing the world economy".

According to David Fuller of Fuller Money this new report doesn't add "significantly to the sum total of knowledge held by veteran" gold investors. But given the turmoil across the markets, it still serves as a nice reminder that when it comes to insuring your assets against tough times, gold is probably as good as it gets.

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