Look up the International Monetary Fund/World Bank table of reserve assets and today’s Western investors might get something of a surprise – gold sits at the very top of that list.
While gold remains the go-to primary reserve asset of the world’s central banks, global super rich, and even the developing world, for some strange reason the precious metal has long been shunned by most ordinary Western investors.
Almost 40% of G7 central bank reserve assets are in gold – the US Federal Reserve holds 74% – and 18% of G20 central bank reserves are in gold, but the average investor’s portfolio exposure is a measly 0.1%. Quite some disconnect.
Academic studies show that 2-5% in gold, as a fixed allocation, is optimal for portfolio diversification purposes. Arguably a higher allocation is merited due to the need for systemic insurance.
In the West, there tends to be a lazy misunderstanding of credit money and gold; in sharp contrast, the developing world understands it. Unwilling to trust their governments to protect the purchasing power of their money, they turn to gold, often in the form of jewellery.
Indeed, Indians pay around a 2-3% premium for finished gold jewellery, a lower premium than we pay for gold bullion products. Silver jewellery is also seen, and used, as a store of value in India.
If inflation rises meaningfully, gold can help protect a portfolio. The gold price typically moves inversely to real interest rates – in other words, when purchasing power falls, the gold price rises – and as such, it can help provide welcome portfolio protection.
Gold has long been the primary mechanism to avoid loss of purchasing power, but why do ordinary Western investors seemingly not get it? Well, for most Western investors, gold is a tiny element that sits within a basket of alternative assets. Not since the turn of the century has it been benchmarked in portfolios, or been seen as a core tenet of a balanced portfolio.
They are missing a trick.
Author: Ned Naylor-Leyland, manager of the Merian Gold & Silver Fund. To find out more about Merian Global Investors, visit merian.com/goldandsilver.
 World Gold Council, Q3 2018
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