In addition, gold is not an income-generating asset. Unlike stocks and bonds, gold's return is based entirely on price appreciation. In addition, an investment in gold entails one-time costs. As it is a physical asset, it requires storage and insurance costs.
And, although gold is traditionally considered to be a safe asset, it can be very volatile and fall in price. Given these factors, gold works best as part of a diversified portfolio, especially when it acts as a hedge against a stock market crash. Let's take a look at how gold has held up over the long term. Similar graphs from the past 5 years can be found here.
This chart compares the historical percentage performance of the Dow Jones Industrial Average with the performance of gold prices over the past 100 years. Data, prices and returns are courtesy of Kitco, DQYDJ, the Perth Mint, the World Gold Council, and Charts, the U. This indicates that over the past 30 years, corporate bonds have returned about 330%, slightly below that of gold. A key factor for consistent returns is the fact that the supply of gold has changed little over a period, increasing just 1.6 percent annually over the past 20 years.
Gold has the ability to significantly improve risk-adjusted returns on portfolios at various risk levels and act as a hedge against inflation, he added. An analysis of investment results over the past two, five and ten years shows that a hypothetical average Indian pension fund would have achieved a higher risk-adjusted return of 5 percent, 7.5 percent or 10 percent if the portfolio had been allocated to gold. Institutional investors are embracing alternatives such as gold to traditional stocks and bonds in pursuit of diversification and higher risk-adjusted returns, he said. Therefore, there are reasons for the current period of poor performance to return to the long-term average return of gold from 9 to 12%.
Despite recent price volatility, gold has delivered an average return of around 8.87 percent over the past 10 years, comparable to equities and slightly higher than bonds and commodities. The S%26P 500 presented an annualized return of 13.8% with dividends reinvested during the last decade ended in March, while benchmark Treasury bonds obtained 2.2% and gold 3.1%. Benchmark Treasury bonds came in last place during this period, with an annualized yield of 3.6%, or 1.5% in inflation-adjusted terms. But gold? It hasn't been as lustrous, returning an annualized profit of only 2.8% during that period.
Let's take a closer look at the returns and risks of investing in gold and the considerations for including it in your investment portfolio.
