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The table that shows you should always hold gold
by Richard Dyson | June 19, 2015

One major investment fund has held 10pc gold for a number of years. And there's a sound statisticical argument for doing so, says Richard Dyson

Among the torrents of verbiage produced daily by the investment industry there are a few regular publications I pore over with enjoyment and close attention.

One is the annual report of the £600m Personal Assets investment trust, the latest issue of which came out on Tuesday.

The trust is hugely conservative in that not losing money is of far, far greater importance than missing the opportunity to make some on the quick.

Its managers are profoundly mistrustful of much of what they see in markets and real life.

Risk is screaming from the rooftops in the form of overvalued Chinese shares (“we have not seen such flights of fancy since 1999”, the report said), and is lurking, “disguised” as “something safe”, in the form of German government bonds.

Diversification, as a strategy, is all but dead, in that everything is both dangerous and correlated.

As a result of this bleak world view, Personal Assets offers a glimpse as to how a portfolio might be constructed to best weather the ultimate in uncertainty.

If inflation resurfaces with a vengeance, 10pc of the portfolio is in gold and 20pc in UK and US index-linked government bonds.

If the menace is deflation, there’s a 30pc cash pile. If shares crash there is comfort in a current exposure to global equities of only 40pc – plus the fact that the stocks held are super-quality defensives such as Nestlé and Coca-Cola.

If the stock market tanks on a truly stunning scale, there’s the £170m cash hoard with which to go buying.

Not everyone has the same conservative approach as Personal Assets. To some the world is not so fraught with risk. But whatever happens, I doubt shareholders will ever accuse the board of needless caution.

The trust has held roughly 10pc of its money in gold since 2010. Another interesting document that came my way this week was the chart, below, which shows how such a holding within a portfolio otherwise made up of British shares and bonds in a 60:40 split would have affected returns over the past four decades.

The research was undertaken by gold investor service BullionVault – so not disinterested – and puts a price on owning gold in terms of its hedging benefits on one hand and loss of long-term returns on the other.

A 10pc holding, for example, would have roughly halved portfolio losses in the worst year of the past 40. The price paid would have been the reduction, by almost two percentage points, in the average annual growth over a five-year period.

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