The advantages of allocating a substantial portion of one’s portfolio to gold have been proven in academic studies over the years. These analyses find the benefits are most pronounced after the Federal Reserve has begun raising interest rates, as is currently the case.
In one of the most noted studies, researchers found that allocating 25 percent of an investment portfolio to gold significantly improved returns during periods of restrictive monetary policy. While a broad portfolio of U.S. stocks delivered an annualized return of 3.9 percent, during the periods when the Fed was raising interest rates between 1973 and 2006, adding a 25 percent allocation of gold raised the annualized gain to 7.2 percent. Boosting the gold allocation by a lesser amount, 15 percent, resulted in an annualized return of 5.9 percent. Gold, by itself, jumped 14 percent-a-year as the Fed gradually raised interest rates. The study was conducted by professors at Texas Tech University, University of Richmond, Northern Illinois University and the CFA Institute.
“The benefits of allocating assets to precious metals are substantial during periods of Fed tightening,” the researchers concluded. This is true because gold has a slightly negative correlation to the stock market, which means the metal has been able to lift portfolios whose equity allocations slump during times of Fed tightening.
The Federal Reserve raised its target federal funds overnight bank lending rate by one-quarter of one percent (25 basis points) in June, the fourth consecutive hike since December, 2015.
Through the entire 34 year study period, encompassing numerous shifts between expansive and restrictive central bank policy, portfolios with an allocation to gold, silver and platinum slightly outperformed a pure equities portfolio. Stocks returned an annualized 10.8 percent, while portfolios with both 15 and 25 percent allocations to precious metals delivered an 11 percent return.