The Case for Gold in Your Investment Portfolio

• Gold has soared to all-time highs in nearly every currency, breaking through resistance levels despite rising real interest rates.
• Central banks and growing demand from emerging markets, especially China, are now the marginal buyers of gold rather than Western financial investors.
• Bonds are no longer the safe, anti-fragile portfolio foundation they were for the last 40 years, and gold may take their place.
• A modified 60/40 portfolio with 40% in alternative assets like gold, silver, mining stocks, commodities and Bitcoin.

Economic Shifts Demand New Investor Playbook

Significant structural changes in geopolitics, financial markets, and the monetary system necessitate a New Investor Playbook. With gold hitting new all-time highs in most currencies, the yellow metal deserves a prominent role in investor portfolios going forward.

The New Marginal Buyers

One of the most significant changes in the gold market is the shift in who is driving demand. In previous decades, the marginal buyers - those whose demand determines the price at the margin - were largely Western financial investors, but today, they are central banks and private investors in emerging markets, particularly China, India, and the Middle East.

The numbers are striking. In 2023, these three regions combined accounted for 65% of the 2,000 tons of global gold jewelry demand. Gold bars and coins, the preferred investment vehicles for private investors in these countries, comprised over half of worldwide demand. This reflects rising incomes and gold's deep cultural significance in these societies.

Meanwhile, gold ETF outflows indicate waning interest from US and European investment funds. A survey cited shows that 70% of US investment advisors have little to no allocation to gold in client portfolios. However, a second wave of inflation or an economic downturn could prompt Western investors to rekindle their interest in gold.

The End of the 60/40 Portfolio?

A balanced portfolio comprising 60% stocks and 40% bonds has been a staple of investment advice for decades. The rationale was that bonds, particularly government bonds, provided steady income and a buffer during equity market downturns. However, in the current environment, bonds no longer provide the safety and stability they once did.

The primary culprit is the high level of debt in developed economies, which has only worsened since the pandemic. The US government interest payments could reach a staggering $1 trillion annually by 2029, raising questions about fiscal sustainability. At the same time, the end of the "Great Moderation" period of low and stable inflation has led to sharply higher interest rates, causing substantial losses for bondholders. The US 10-year Treasury, for instance, is down over 22% since 2020.

This has upended the negative correlation between stocks and bonds underpinning the 60/40 model. In this new regime, gold is well-positioned to take over the role of portfolio stabilizer and diversifier that bonds once played.

The Geopolitics of De-Dollarization

China, Russia, and other countries have reduced their reliance on the US dollar in international trade and finance through efforts that are complex and long-term and have significant geopolitical ramifications. It's a global geopolitical chess game with high stakes. While it remains to be seen how successful these efforts will be and how the West will respond, a shift away from a dollar-centric global financial system could have major implications for gold.

One possibility is the potential emergence of a gold-backed currency. While acknowledging the uncertainties involved, such a development could significantly boost gold's monetary role and drive demand.

A New Allocation Model

It's time to rethink the classic 60/40 portfolio allocation. Maybe a 40% allocation to alternative assets, including physical gold and silver, precious metals mining stocks, commodities, and bitcoin, alongside a 60% allocation to traditional financial assets like stocks and bonds. This guides tactical shifts between "performance" gold assets like mining stocks and "safe haven" holdings like physical gold. Backtesting of the model shows significantly higher returns compared to a static allocation.

This new allocation model, combined with tactical adjustments guided by their proprietary signal, offers investors the best way to position their portfolios for the economic and monetary challenges ahead, with gold playing a key role in providing diversification, inflation protection, and stability.

The Investment Thesis for Gold

• Portfolio diversification: Gold has a low correlation to equities and bonds
• Inflation hedge: Gold has historically performed well in inflationary periods
• Safe haven: Gold offers stability in times of financial or geopolitical stress
• Central bank demand: Continued buying by central banks creates a price floor
• Emerging market demand: Rising incomes and gold's cultural role in China, India and the Middle East should support long-term demand
• Declining faith in fiat: Concerns about debt levels and currency debasement enhance gold's appeal as a monetary asset
• Mining stocks: Exposure to gold price with additional upside from operational leverage
• New allocation model: A 40% alternative asset allocation, including gold in a modified 60/40 portfolio

Actionable advice

• Consider a 40% allocation to alternative assets like gold in your portfolio
• Use a timing model to optimize allocations between physical gold and mining stocks
• Rebalance regularly to maintain target allocations

Structural changes in the global economy and financial markets require investors to adapt. With strong demand from central banks and emerging markets, gold looks well-positioned to take over the portfolio stabilizer role from government bonds. Investors could consider significant allocations to gold, either directly or through mining stocks, as part of a modified 60/40 portfolio, using a tactical timing model to optimize their exposure.