Has gold lost its luster? After hitting an all-time high of nearly $1,800 an ounce in late 2012, the yellow metal fell back to $1,200 an ounce a year later, and has remained around that price ever since. Blame goes to a fear trade that simply never panned out.

But gold can still play an important role for investors. First, it can dampen volatility because it’s non-correlated with stocks and bonds. Gold exposure “takes you further out on the risk/reward frontier,” says Trey Reik, a senior portfolio manager at Sprott Asset Management, suggesting a portfolio with both gold and stocks can augment returns and reduce volatility.

His firm found that by adding 10% gold exposure to a traditional 60/40 stock and bond portfolio over the past 40 years, investors would have added around 18 basis points in returns annually while reducing a portfolio’s standard deviation by nearly 2 percentage points. Gold has slightly outperformed equities in that time, and has done especially well in some periods of stock market stress.

Indeed, a big reason to consider gold in a portfolio is that it’s considered a hedge against economic and financial crises. We’re nearing the end of an era of remarkably low interest rates, and central banks will eventually need to unload the trillions in assets they accrued through quantitative easing programs even as they start to boost interest rates back toward normal levels. And that could yield unpredictable market outcomes.

“In most instances of financial stress, gold is inversely correlated with stock and credit market returns,” says Russ Koesterich, portfolio manager of BlackRock’s Global Allocation fund (MALOX).

Reik thinks that such stresses are more likely than many realize. Further strength in the dollar, for example, could lead to a rising level of problems with emerging market debt. “A debt default wave is inevitable,” he predicts, which would restore gold’s luster as a safe haven asset.

Currency Baskets
Few strategists suggest a large position on gold. “We recommend that it comprise around 5% to 7% of a portfolio,” says Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, which controls $138 billion in client assets.

The SPDR Gold Shares (GLD), with $33.3 billion in assets and a 0.40% expense ratio, is by far the largest gold-focused exchange-traded product. But that fund doesn’t address a key concern. Namely, gold prices tend to move in the opposite direction of the dollar, and periods of dollar strength like we’ve seen in recent quarters can dampen returns.

As all commodities are priced in dollars, “by definition, you’re shorting the dollar because you’re selling dollars to buy commodities,” says Dennis Gartman, editor and publisher of the Gartman Letter. That’s why a growing group of funds now enable investors to zero in on gold exposure by minimizing dollar risk.

The SPDR Long Dollar Gold Trust (GLDW), for example, combines a long position in physical gold and a long dollar exposure against a basket of other developed market currencies. This ETF launched on February 1, so it’s too soon to develop any sort of comparison with the unhedged SPDR Gold Shares ETF. The GLDW’s expense ratio of 0.50% is 10 basis points higher than the GLD fund, the difference being that adding significant short positions to a fund results in extra fees.

First « 1 2 » Next