To gold or to stocks - that is the question

There is a common investment advice that gold should be 5-10 per cent of an investment portfolio as a matter of diversification.

Positive market fundamentals and the hopes of investor-friendly tax reform is helping stock markets in the US and around the world in making higher profits.

"Investors are more attracted towards stocks as compared to precious metals such as gold. As a result, the S&P 500 has returned ~15 per cent profits as of the end of October 2017 on a year-to-date basis. Other world indices such as MSCI World UCITS ETF and MSCI Emerging Markets ETF rose nearly 17 per cent and 32 per cent, respectively, in the same period," said Badal Parande, analyst, Investment Research and Analytics at Aranca.

There is a common investment advice that gold should be 5-10 per cent of an investment portfolio as a matter of diversification. Diversification comes from the fact that in the short term, gold prices tend to rise in times of geopolitical trouble as a flight to quality, exactly at a time when other asset classes lose value due to uncertainty or panic.

"In 2017, the Comex price of gold moved from $1,173 to $1,276, which is an 8.77 per cent return on the year as of November 10. By comparison, during the same time period, the S&P had a price return of 14.37 per cent. If we add in dividends, the total return for the S&P 500 is slightly higher at 14.55 per cent, which raises the important point that there is no income associated with owning gold, total return is only from price movements. When looking at investment returns, it is important to not only look at the absolute returns but also at the returns relative to other investments. The difference between returns is an opportunity cost," Ted Stephenson, CFA, executive director of CFA Society Emirates, explained.

Gold was highest on September 7 at 1,346 and since then the price has fallen while the S&P 500 has continued to rise throughout the year.

"Indeed, the six-month correlation between gold and the S&P 500 is negative (-0.31) and a correlation of anything less than one adds diversification benefits to a portfolio which supports the inclusion of gold. Note that this correlation coefficient is not stable but in general, on average there is a correlation between gold and stocks which is well below 1," he continued.

"We also noticed that the price of gold is more volatile than the S&P 500. We measure volatility through standard deviation and the three-year standard deviation on the price of gold is approximately 14 per cent while the three-year standard deviation of the S&P 500 is about 10 per cent. Greater volatility appeals to speculators who trade more frequently which is one of the reasons why gold is a popular investment for many active investors and speculators," Stephenson concluded.

- riaz@khaleejtimes.com