What to Consider When Implementing
Gold in a Portfolio
March 2017
Gold demand jumped 2 percent in 2016,
according to the World Gold Council
amid strong investment demand
that was offset by declines in central
bank purchases and jewelry demand.1
Investment demand highlights
the potential for portfolio riskmitigation that gold can provide in an
environment of global negative interest
rates as well as uncertainty around
global monetary policy.
We’ve previously discussed how turbulent market conditions,
like those we saw last year, present investors with an
opportunity to evaluate the merits of a small, strategic
allocation to gold in a portfolio. We want to revisit the strategic
case for investing in gold, and address how investors should
consider implementing the precious metal in a portfolio.
of the portfolio. Such tactical selling, such as occurred during
the autumn of 2008 after the Lehman Brothers bankruptcy,
does cloud some of gold’s allure as a portfolio diversifier. Despite
this, a strategic allocation to gold may provide diversification
for a portfolio in the long-run.
As shown in Figure 1, gold has a demonstrated historically low
correlation to most key asset classes, such as stocks and bonds.
This low historical correlation has allowed gold to act as a
portfolio diversifier.
Figure 1: Gold’s Historically Low Correlation with
Other Assets
Equities
MSCI ACWI Index
MSCI Emerging
Markets Index
S&P 500 Index
0.0
Two Strategic Reasons to Hold Gold
While gold can play many roles in a portfolio, there are two we
want to highlight when it comes to gold implementation. First,
gold can be used to potentially improve diversification given its
historically low correlation with traditional asset classes.
Second, the precious metal also has the potential to act as a
hedge against stock-market volatility. Both charts contained in
Figure 1 below capture these attributes.
Although gold historically has had a low correlation with
traditional assets, it can at times move in tandem with these
assets. Rising correlation can occur during periods when the
market is facing liquidity constraints. During such times,
investors can liquidate gold to shore up assets in other areas
0.2
0.4
0.6
0.8
1.0
Fixed Income
Bloomberg Barclays 1–3 month
U.S.Treasury Bill Index
Bloomberg Barclays Global
Aggregate Corporate Index
Bloomberg Barclays U.S.
High Yield Corporate Index
Bloomberg Barclays
EM Local Currency
Government Diversified Index
Bloomberg Barclays
U.S. Aggregate Bond Index
0.0
0.2
0.4
0.6
Source: Bloomberg Finance L.P., State Street Global Advisors (SSGA).
(10-year correlation from 1/31/07 to 01/31/2017).
0.8
1.0
What to Consider When Implementing Gold in a Portfolio
Figure 2: Gold Volatility to Equity Markets
Volatility Comparison (USD %)
3 Months
(%)
Gold
6 Months 1 Year
(%)
(%)
3 Years
(%)
5 Years
(%)
10 Years
(%)
15.33
14.98
16.43
15.00
17.03
19.90
S&P 500
8.53
10.70
14.04
10.26
10.18
15.55
MSCI ACWI Index
6.99
11.12
12.59
10.79
11.18
17.39
MSCI Emerging
Markets Index
12.97
14.43
16.59
16.17
15.53
24.09
Bloomberg
Comodity Index
12.58
13.48
14.93
13.98
13.53
18.41
3 months, 6 months and 1 year = Days are annualized as a factor of 260
3 years, 5 years, and 10 years = months are annualized as a factor of 12
Gold 30 Days Rolling Annualized Volatility (USD %)
60
Assessing the required rate of return needed to achieve
long-term objectives, as well as expectations for market
volatility, can be a useful guide for determining an
allocation to gold.
How much of a portfolio should an individual investor
allocate to gold? One way to determine this is to consider
personal expectations for return and volatility along with
the outcomes that you are trying to achieve. Regardless of
what those may be, gold can potentially help provide a ballast
in portfolios as it has historically exhibited a low correlation
to traditional asset classes.
Using ETFs to Invest in Gold
Gold ETFs, such as SPDR® Gold Shares (GLD®), provide
investors an efficient way to gain access to the gold market
without having to pay the transportation, storage and
insurance costs of holding physical gold. Holding gold ETFs
allows investors to view their gold allocation holistically
across their entire portfolio, and these gold funds provide
liquidity, flexibility and accessibility.
45
30
15
0
Investors can hold gold in a portfolio to potentially guard
against risks from unforeseen events. Gold should not be
viewed in isolation, but rather as a strategic component
within a portfolio that has the potential to help improve
returns while helping to manage volatility, unexpected
market events and inflation.
Jun
2006
Oct
2008
Feb
2011
Jun
2013
Dec
2016
Source: Bloomberg Finance L.P., State Street Global Advisors, from 6/30/2006
to 12/31/2016.
As Figure 2 shows, compared to equities and bonds, gold has
typically been somewhere below the middle of the volatility
spectrum. This has helped gold to potentially act as a hedge
against equities, and as investors attempt to reduce the overall
risk in a portfolio.
Implementing Gold in a Portfolio
The mistake many investors make when it comes to investing
in gold is that they use it in an attempt to time the market.
Investors tend to flee gold when the stock market is rallying but
turn to the precious metal when times get tough. However, by
the time investors react, chances are the value of their portfolio
has dropped while the price of gold has risen — eliminating
some of the benefits of a gold exposure.
State Street Global Advisors
For instance, more than $1 billion worth of GLD shares trade
each day, putting GLD in the top 99th percentile of all stocks
and ETFs traded on NYSE Arca.2 In addition, GLD investors
can buy as few or as many shares as they want, giving them
ownership in fractional ounces of gold. GLD also trades in the
same way ordinary stocks do, allowing investors to buy, sell
and hold this ETF through standard brokerage accounts.
With GLD, investors can readily integrate and measure gold as
a strategic presence in a portfolio that can potentially diversify
risk and be incorporated into a broad asset allocation
framework of investing.
1
2
World Gold Council, “Gold Demand Trends Full Year 2016,” published 02/2017.
Bloomberg Financial L.P, SSGA Research, as of 12/31/2016.
2
What to Consider When Implementing Gold in a Portfolio
Glossary
Bloomberg Barclays 1–3 Month U.S. Treasury Bill Index A fixed-income
benchmark including publicly issued dollar-denominated zero-coupon US Treasury
Bills that have a remaining maturity of less than three months and more than
one month. They must be rated investment grade, have $250 million or more of
outstanding face value and be fixed-rate and non-convertible.
Bloomberg Barclays U.S. Aggregate Bond Index A benchmark that provides a
measure of the performance of the US dollar denominated investment grade bond
market, which includes investment grade government bonds, investment grade
corporate bonds, mortgage pass through securities, commercial mortgage backed
securities and asset backed securities that are publicly for sale in the US.
Bloomberg Barclays EM Local Currency Government Diversified Index
A benchmark designed to measure the performance of fixed-rate local currency
sovereign debt of emerging market countries. The index includes government bonds
issued by countries outside the US in local currencies that have a remaining maturity
of one year or more. They must be rated B3/B-/B- or higher, be fixed-rate and have
certain minimum amounts outstanding, depending on the currency denomination of
the bonds.
Bloomberg Barclays Global Aggregate — Corporate Index A benchmark
designed to be a broad-based measure of the global investment-grade, fixed-rate,
fixed-income corporate markets outside the US. The index is part of the Bloomberg
Barclays Global ex-USD Aggregate Bond Index.
Bloomberg Barclays U.S. High Yield Corporate Index The Barclays U.S. High
Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds
and debt issues from countries designated as emerging markets (sovereign rating
of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are
excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG
countries are included. The index includes both corporate and non-corporate sectors.
MSCI ACWI Index The MSCI ACWI Index is a free-float weighted equity index that
includes companies in both emerging and developed world markets.
MSCI Emerging Markets Index The MSCI Emerging Markets Index captures
large and mid-cap representation across 23 emerging markets countries. With 834
constituents, the index covers approximately 85% of the free float-adjusted market
capitalization in each country.
S&P 500 Index A popular benchmark for U.S. large-cap equities that includes 500
companies from leading industries and captures approximately 80% coverage of
available market capitalization.
S&P GSCI Index A production-weighted index launched in 1992 that tracks the
performance of 24 commodity futures contracts. The index tilts to commodities that
are more heavily produced globally, so it weights more heavily to crude oil than, say,
to cocoa.
ssga.com | spdrs.com
For public use.
The information provided does not constitute investment advice and it should not
be relied on as such. It should not be considered a solicitation to buy or an offer to
sell a security. It does not take into account any investor’s particular investment
objectives, strategies, tax status or investment horizon. You should consult your
tax and financial advisor.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and
may trade at prices above or below the ETFs’ net asset value. Brokerage commissions
and ETF expenses will reduce returns.
While the shares of ETFs are tradable on secondary markets, they may not readily
trade in all market conditions and may trade at significant discounts in periods of
market stress.
Commodities and commodity-index linked securities may be affected by changes
in overall market movements, changes in interest rates, and other factors such as
weather, disease, embargoes, or political and regulatory developments, as well as
trading activity of speculators and arbitrageurs in the underlying commodities.
Investing in commodities entail significant risk and is not appropriate for
all investors.
Important Information Relating to SPDR Gold Shares Trust:
The SPDR Gold Trust (“GLD ”) has filed a registration statement (including
a prospectus) with the Securities and Exchange Commission (“SEC”) for the
offering to which this communication relates. Before you invest, you should
read the prospectus in that registration statement and other documents
GLD has filed with the SEC for more complete information about GLD
and this offering. You may get these documents for free by visiting
EDGAR on the SEC website at sec.gov or by visiting spdrgoldshares.com.
Alternatively, the Trust will arrange to send you the prospectus if you
request it by calling 866.320.4053.
®
GLD is not an investment company registered under the Investment Company Act
of 1940 (the “1940 Act”) and is not subject to regulation under the Commodity
Exchange Act of 1936 (the “CEA”). As a result, shareholders of the Trust do not have
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the protections associated with ownership of shares in an investment company
registered under the 1940 Act or the protections afforded by the CEA.
GLD shares trade like stocks, are subject to investment risk and will fluctuate in
market value. The value of GLD shares relates directly to the value of the gold held
by GLD (less its expenses), and fluctuations in the price of gold could materially and
adversely affect an investment in the shares. The price received upon the sale of
the shares, which trade at market price, may be more or less than the value of the
gold represented by them. GLD does not generate any income, and as GLD regularly
sells gold to pay for its ongoing expenses, the amount of gold represented by each
Share will decline over time. Investing involves risk, and you could lose money on an
investment in GLD. Please see the GLD prospectus for a detailed discussion of the
risks of investing in GLD shares.
Investing involves risk, and you could lose money on an investment in GLD. Please
see the GLD prospectus for a detailed discussion of the risks of investing in GLD
shares. The GLD prospectus is available by clicking here.
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permission of the World Gold Council pursuant to a license agreement. The World
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reliance on, this material.
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For more information contact State Street Global Markets (marketing agent
for GLD), LLC, One Lincoln Street, Boston, MA, 02111, 866.320.4053 or
visit spdrgoldshares.com.
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