Diversifying Client Portfolios With Gold

With much debate over the potential direction of the economy and the markets in 2024, a growing number of Americans are actively seeking investment options to shield their portfolios from uncertainties and optimize their diversification. Gold, given its lack of correlation with other financial assets such as equities and bonds, is piquing the interest of investors and providing advisors with an opportunity to educate clients about its role in a well-balanced portfolio.

According to State Street Global Advisors recent Gold ETF Impact Study, more than half of existing gold investors are looking to increase their investment in the precious metal in the coming months. Interestingly, millennials exhibit a stronger inclination to hold gold in their portfolios compared to Generation X and baby boomers. On average, millennial investors with gold currently held in their portfolios are allocating 17% of their assets to the precious metal, compared to 10% for both Gen X and baby boomer gold investors.

However, only one-in-five (20%) U.S. investors across all ages currently own gold in their portfolios, with many admitting that they simply don’t know enough about the investment benefits of the metal.

Gold ETFs Enhancing Access to the Asset Class

Remarkably, 73% of existing gold ETF investors affirm that their holding has improved their investment portfolios’ performance, with an additional three-fourths stating that ETFs offer a more cost-effective route to gold investment.

The perceived benefits of gold ETFs that investors find appealing include convenience (90%), the ability to capitalize on price shifts without dealing with physical gold (89%), and the user-friendly nature of gold ETFs (85%).

Knowledge and Advice Keys to Adoption

More than one-third of the investors surveyed (36%) said they don’t own gold in their portfolio because they don’t know enough about the ways they can invest in gold. By contrast, a staggering 91% of investors surveyed who already own gold ETFs revealed their financial advisor provided them with information about different methods of investing in gold.

Less than half of investors surveyed (41%) claimed to understand the factors influencing movements in the price of gold, compared to 75% of those who own gold in their portfolios.

Time to Shine

In light of these knowledge gaps, financial advisors clearly have a timely opportunity to educate investors aiming to enhance their portfolio diversification and safeguard their wealth. Expertise in understanding the distinctive qualities of gold and its strategic role within a portfolio can help position advisors as essential resources for informed investment decisions that can help smooth the ups and downs of today’s financial markets.

Notably, as the allure of gold continues to grow, so does the prevalence of misinformation, leaving investors vulnerable to misconceptions. Financial advisors can help dispel myths and enhance clients’ comprehension of gold investments.

Looking ahead, we anticipate an increase in demand and price for gold investments will be driven by the three Rs:

  • Rates – the transition from rate hikes to a rate halt should provide a tailwind for gold;
  • Recession – given the prevailing expectations of a global market slowdown, gold has the ability to demonstrate its resilience as seen during the past seven US recessions since 1973; and
  • Risk – with uncertainty surrounding geopolitical challenges in the market, gold has proven to be a reliable asset for protecting portfolios against market shocks.

Gold has historically demonstrated a low correlation with traditional financial assets like stocks and bonds, making it a valuable diversification tool. Educating investors now on the benefits of maintaining a 2%-10% gold portfolio allocation level could be imperative for maximizing returns in the coming years.

George Milling-Stanley is chief gold strategist at State Street Global Advisors.

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