Why Gold is Important for Long-Term Wealth Accumulation
In a recent study, Prof. Thorsten Hens and Alvin Amstein analyze the role gold plays in long-term wealth accumulation. This is because the precious metal demonstrates particular strength in times of crisis. Text: Cornelia Kegele
Gold is not only a popular metal used in jewelry, but has also served as a store of value for thousands of years. Due to its special properties such as durability, immutability, and limited availability, the demand for gold remains high. For these reasons, central banks continue to rely on gold as a hedge in times of crisis.
Gold as a counterpart to stocks
In a recent study, Prof. Thorsten Hens and Alvin Amstein from the Institute of Finance at UZH shed new light on the role of gold in comparison to traditional forms of investment such as stocks and bonds, and examine how well gold is suited to long-term wealth accumulation. For example, someone who invested USD 100 in stocks 50 years ago would now have around USD 14,800. If they had invested in gold, they would have USD 6,000, and in bonds, around USD 4,300. However, stocks can lose a lot of value in the short term, as was the case during the dot-com bubble, the financial crisis of 2007/08, and the coronavirus crisis, when they temporarily lost up to half of their value.
In tough economic times, gold always shows how resilient it is to crises—often with better returns than other asset classes. The study by Hens and Amstein shows that combining stocks and gold lowers portfolio volatility and can lead to higher returns than just stocks alone. The study by Hens and Amstein shows that combining stocks and gold reduces portfolio volatility and can result in higher returns than with stocks alone. This is because gold secures liquidity in times of crisis: it can be sold to invest in stocks at a favorable price – and after the crisis, stocks can be exchanged back for gold.
Optimal gold allocation in a portfolio
Based on data since 1972, Hens and Amstein calculated the optimal mix of gold and equities – for different risk preferences, different reference currencies (USD, CHF) and for different equity investments (international or domestic only) with and without taxes. Their calculations show that the optimal gold allocation, averaged across all cases, should be ten percent. This percentage increases with higher risk aversion and a focus on international stocks (i.e., without home bias). Since gold does not offer any current income such as interest or dividends, it often has a tax advantage over other asset classes that are taxed.
This so-called “gold study,” which was sponsored by Bank von Roll, shows that gold plays an important role in long-term wealth accumulation and helps to determine an individually optimal gold allocation. Although gold does not promise high returns, it offers protection in times of crisis—and can even generate higher returns than stocks alone in a portfolio containing stocks.
Thorsten Hens is a professor of finance at the Institute of Finance at the University of Zurich and teaches courses in finance executive education at the University of Zurich.
Text: Cornelia Kegele
Source: Oec. Magazine issue #23