New research by Oxford Economics suggests that higher allocations to gold could benefit portfolios in both inflationary and deflationary scenarios, according to independent analysis by the research body and commissioned by The World Gold Council, entitled The impact of inflation and deflation on the case for gold.

“This research comes at a time when high inflation is an ongoing reality for many developing economies, while Western economies face the threat of protracted low growth, low inflation or even deflation. In this context, we wanted to understand why gold is being reconsidered as a risk management asset, particularly if one of the many divergent inflation scenarios came to pass,” said Marcus Grubb, managing director of investment at the World Gold Council.

The research suggests that gold’s share of an optimal portfolio is around 5 per cent in a base long-term economic scenario featuring 2.25 per cent growth and 2 per cent annual inflation, a finding that is constructed from the perspective of a UK investor in order to utilise a long run of historical asset returns data (going back to 1971) available for the UK. This is a higher allocation than seen in typical mainstream portfolios, says the report, although the analysis does not include other assets such as index-linked bonds, foreign securities and other commodities. The optimisation analysis uses a simplified model including gold, cash, equities, bonds and commercial property only.

“Because of its lack of correlation with other financial assets, the report shows that gold has an important role to play in stabilising the value of a portfolio, even where the conservative assumption of a modest negative real annual return is made. In addition, gold offers protection against extreme events such as high inflation and financial market distress,” said Jens Tholstrup, the UK managing director of Oxford Economics.

“This study suggests that typical investor allocations to gold are sub-optimal.  The vast majority of investors still have little or no allocation to gold, which places significant capital at risk. The evidence in favour of a continuous strategic allocation to gold has been growing for some time and gold’s benefits in an investment portfolio should be reappraised,” said Grubb.

The report uses the proprietary Oxford Economics Global Model to examine gold’s performance relative to other assets under a range of inflation scenarios. It also examines the investment case for gold within a portfolio under different long-term economic conditions. The full report can seen at www.gold.org/media/.