Fri, 20/06/2014 - 10:00
Gold exhibits the characteristics of liquid alternatives (liquid alts) without many of the inherent disadvantages associated with this growing sector, according to a paper by the World Gold Council (WGC).
There has been a surge in the creation and demand for liquid alternatives following the financial crisis as investors look to alternative assets to provide efficient risk-adjusted returns and diversify risk exposures from traditional securities such as stocks, bonds and cash.
The paper – The most liquid of all liquid alts – examines how gold exhibits all of the characteristics which differentiate liquid alternatives from other alternative assets, such as hedge funds or private equity, including liquidity and daily pricing, but also highlights the additional advantages gold can offer which are not available with many liquid alternatives. These include:
• Deeper liquidity – Gold is one of the most liquid assets in global markets and its average daily volume rivals those of major currency pairs.
• Cost advantage – The cost of vaulting allocated physical gold or owning gold through an exchange-traded fund (ETF) is typically lower than 50 basis points per year. When compared to the average cost of mutual fund liquid alternatives (1.9 per cent), gold can deliver similar desired investment characteristics at a fraction of the cost, while maintaining easy market access.
• Long track record – The added benefits of adding gold to an investment portfolio have been studied and reported extensively and gold has been freely traded since the 1970s.
• No cash drag – Liquid alternatives often keep cash on hand to meet potential investor redemption requests, resulting in a drag on performance relative to their benchmark. There is no liquidity discount or cash drag when investing in physical gold or fully physically-backed ETFs.
Juan Carlos Artigas, director of investment research at the World Gold Council, says: "The long term trends for liquid alternatives are extremely favourable as investors are expected to continue allocating portions of their portfolios to non-traditional investment options. Based on our research, gold may be the ideal liquid alternative as it shares the same advantages of this unique subsector, without some of the inherent disadvantages. Further, holding gold in a well-diversified portfolio – even one that includes alternative assets – can improve performance by reducing risk, and resulting in better risk-adjusted returns.
"Investors looking at liquid alternatives may consider investments in gold either through physical bullion and coins, ETFs, derivative contracts such as futures and options, or a combination thereof."
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