All that glitters – should we go for gold in Nutmeg portfolios?

Pacome Breton


2 min read

2018 was a difficult year for markets and it left many people searching for a glimmer of hope from any asset class that could offer some level of return. A few Nutmeg customers spotted that gold had started to shine and contacted us to see if we’d be upping the gold content of our portfolios. Here, we take a look at the two sides to this attractive element and show why it’s important not to always be blinded by this precious metal.

Gold nuggets on a black background. Closeup

Gold can be an attractive investment in a portfolio, especially in a crisis or negative market environment, but it isn’t always as straightforward as it seems.

Since the global financial crisis in 2008, gold has been given a status close to religion among some investors, professional and non-professional alike. John Paulson, who came to fame for shorting the subprime market in 2008 and featured among Michael Lewis’ characters in “The Big Short” went as far as offering a fund with purely gold and gold-related investments1. It’s not that long ago that we were hearing the price of gold bullion could be on track for $10,0002.

Running the numbers on gold

We wanted to show you the impact an increase in gold allocation would have had on our medium to higher risk portfolios, using simulations of past performance over the past 10 years (up to 07/03/2019).

The table below highlights the portfolio increased (or decreased) return on a yearly basis by increasing the gold allocation.

Gold-pic-1

On average, increasing the allocation to gold would have negatively impacted the performance of our portfolios (-0.27% for risk 5 to -0.47% for risk 10 averaged over the last 10 years) but it would have provided some support in difficult periods like 2018, 2016, and also in 2008 if Nutmeg had existed back then.

One point worth looking at is the performance difference in 2018 compared to 2019 so far. Though some gold exposure would have helped in 2018, so far in 2019 all the excess return generated by gold in 2018 would have been taken away.

The Nutmeg view

So, all in all, gold remains an interesting asset class and one we watch carefully. We remain ready to use it in our portfolios if needed. But while it can be attractive to use gold for support in a negative market, it’s not a straightforward long-term investment and can easily do more harm than good.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

Sources

  1. Financial News London 2009. Paulson & Co to launch
  2. CNBC 2011, ‘Return to Gold Standard? Why Price Would Hit $10,000?
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Pacome Breton

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