In the past, Schwarz has held up to 10% of his portfolio in gold. But last year he sold his entire position in the shiny metal. He says he’s currently re-evaluating his position. “If inflation rises, stocks will probably rise along with gold,” notes. “Gold is a good inflation hedge, and with the relative performance in 2013 I think it is a more attractive asset class.”
He adds that the S&P 500 index was up 31 percent last year versus gold’s 27 percent drop, which marked the biggest relative underperformance by a wide margin in the past 15 years.
That said, certain macro scenarios could bode poorly for the precious metal. “If Yellen continues to taper, the gold ETFs could continue to underperform,” Schwarz says. “As interest rates rise the payoff for a zero interest rate asset is less attractive.”
While advisors will need to determine their willingness to make macro forecasts and to add gold to their portfolios, gold should remain a preferred asset if confidence in equities and bonds falter. Adding ETFs with physical ownership of gold––and eschewing the equity shares of gold mining firms––might be a useful way of reducing risk in client portfolios.