Gold: An SMSF's New Best Friend

Gold has delivered strong returns in Australian dollar terms over the past year, outperforming major assets like stocks, bonds and commodities. This performance has attracted increased attention from central banks and institutional investors like Australia's sovereign wealth fund, which have been adding gold to their portfolios.

With high inflation, slowing growth and other economic risks ahead in 2023, gold's historical performance shows it can provide resilience during periods of market turbulence and stagflation. Analysis indicates adding a 5% allocation to gold over the past 20 years could have increased returns while reducing volatility and maximum drawdowns for a typical Self-Managed Super Fund (SMSF) portfolio. Gold deserves consideration by SMSF investors seeking stability, inflation protection and improved risk-adjusted returns.

Gold's Strong Performance

The price of gold in Australian dollars rose 7% in 2022 and has gained another 7% so far in 2023, significantly outperforming stocks, bonds and other major assets. This follows gold's record AUD price highs above $2,750/oz reached in 2020 during the early stages of the pandemic.

Central banks remained net buyers of gold in 2022, adding over 1,000 tonnes to global official reserves. Purchases are expected to continue as 24% of central banks surveyed plan to increase reserves over the next year. Australia's sovereign wealth fund, the Future Fund, also recently added gold to its portfolio as a defensive position against high inflation and currency risks.

Heightened Risks Ahead

Economic risks have increased heading into the second half of 2023. Inflation in Australia hit a 32-year high of 7% in the first quarter, surprising forecasts. The Reserve Bank of Australia also warned achieving a soft landing for the economy could be difficult.

Meanwhile, projections for Australia's GDP growth in 2023 have been downgraded to just 1.5%, indicating potential stagflation pressures ahead. Geopolitical conflicts and other shocks could further disrupt global markets.

Gold's Role in Portfolios

Historically, gold has performed well during periods of high inflation and stagflation. Analysis shows gold's correlation to equities tends to fall when inflation is elevated, while bonds become more highly correlated, reducing their portfolio diversification benefits.

In 'stagflationary' periods since the 1970s, gold price returns in Australian dollar terms have averaged over 11% annually - significantly higher than stocks, bonds or commodities. This reflects gold's safe-haven appeal.

Modelling indicates adding a 5% gold allocation to a typical SMSF portfolio over the past 20 years could have increased returns from 6.4% to 6.5% annually. More importantly, it could have reduced volatility from 9.6% to 9.0% while also decreasing maximum drawdowns. This highlights gold's risk-reducing attributes.

Conclusion

With high inflation persisting and risks of an economic slowdown mounting, conditions appear conducive for gold to provide resilience in SMSF portfolios. Historical data and portfolio analysis make a compelling case for Australian investors to consider adding a strategic allocation to gold for stability, inflation hedging and improved risk-adjusted returns.