I'm George milling Stanley head of gold strategist State Street Global Advisors
if you can cast your mind back to the summer of
1972 and if it helps you to picture this I had an afro at the time a lot of things have changed since then I
was a reporter on a magazine in London Financial
Magazine and the editor came to my door and he said George it's been 12 months since President Nixon closed the gold window
What do you think of that? And I looked up at him and said I'm the faintest idea what you're talking about
I don't what that means. He said good because I don't understand it either
I just read it somewhere
But if you and I don't understand it that means our readers don't understand it either
Go find out about the gold market and write me a story
I mean here we are 47 years later still chasing the same story
I've been involved in gold in a lot of different ways since then I
Spent 10 years with the Financial Times writing about the gold mining industry worked for a gold mining company
Running something that we called gold market intelligence
Then I moved to this country to trade gold at Shearson which gradually became Lehman Brothers
They closed down their physical commodity operations in the mid 1990s
I went to work for something called the World Gold Council
Which is a promotional organization financed by the gold mining company
so back to that area if you like and most of what I was doing there was
advising central banks on how they managed the whole reserve portfolio
but with particular reference to to the role Gold can or should play in the management of reserves and
then after 15 years there I
Set up my own little
consultancy and thought I was gradually going to wind down until I was working three days a week and then two days a week and
Then suddenly no days a week
But State Street at the time was my biggest client and they said we'd like you to come on board
set up a team around the world and
Transfer your knowledge to them and work your way work yourself out of a job in the next five to 10 years
So that's four years ago. I checked last week to make sure that the ten-year options still on the table. I'm having a ball
I think you really need to look at at the whole portfolio
I think that's really where you start from and
I'm not suggesting anybody should have a hundred percent of their investments in Gore even 50 percent the literature the
reliable literature the good quality stuff
Suggests that any portfolio could benefit from somewhere between two and ten percent of the total as a strategic allocation
That's a pretty broad
Remit if you like
Personally, I think that five makes a lot of sense for me and probably for a lot of other people too
We did a study
my team my gold strategy team at State Street did a study two or three years ago where we were looking not at a
60/40 portfolio because nobody has those anymore. We were looking at a global multi-asset portfolio
With some exposure to obviously two stocks and bonds, but also to real estate commodities
Managed futures various other different things and we plugged in various different levels of of gold into that portfolio
We started with 2% 5% and 10% and what we found was that at the 10 percent level?
There was the biggest reduction in risk over the whole portfolio and the biggest increase in returns
So risk adjusted returns were optimal at that 10 percent allocation to gold
That was the best sharpish ratio that we found now
I don't walk into meetings and say to people you've got to have 10% across all your portfolio's. Otherwise, you're doing something wrong
What I say is look if you don't have any gold try 2% and you will experience
Empirically the good things that a small allocation the gold can do for your portfolio
If you've got 2% try 5 if you've got 5 why don't we brave and try 10 and see what that actually does for you
So that's broadly I think the reasons why people ought to be interested, how does gold do this?
Why does it succeed in reducing risk and increasing returns, I guess the first thing to say
Is that a lot of people think that because gold doesn't have a coupon or a dividend. It's an asset without a yield
I'm sure you've heard that before
But if you go back to 1971
Which is the beginning of the free market in gold and also coincidentally the beginning of my experience at the gold market?
Since that time on a compound annual growth rate basis gold has returned seven and a half percent
That's actually not too shabby for something that most people think doesn't actually have a return
So that's one thing gold does give you an absolute return or it has done for the last 50 years or so
Secondly gold doesn't really have a strong relationship with anything else in the portfolio
Not a positive relationship or a negative relationship. It's an uncorrelated asset as the as the
Economists call it that means that it's giving you a level of diversification within the portfolio that few other assets can match
Third gold is a huge market. It's very deep and liquid. It's dominated by the over-the-counter market
people-to-people principal to principal rather than the futures exchanges, which is where most
Financial assets are actually traded on the futures exchange goals, unlike them completely different from them
So a very very deep and liquid market turning over according to the most recent studies in
excess of a hundred billion dollars a day
That's the whole gold market. Now that's dwarfed by Treasuries, but then everything's dwarfed by the Treasury market
But it isn't that far behind Japanese government bonds
It's comfortably ahead of the UK gilts market or the German bond market or any other
Government bond market you care to mention
So I think gold kind of earns its place in the mainstream on liquidity grounds as well. And then finally
The overall impact on the portfolio. I've already mentioned the Sharpe ratio
I mentioned that gold can help to improve risk adjusted returns and that can be demonstrated
Gold also has thousands of years of a track record
you can't say that about every asset you can't set about Bitcoin for example gold has thousands of years of a track record as
Offering some protection against the unexpected
Whether your tail risk is macroeconomic in nature or geopolitical
So it's portfolio impact is beneficial those I think are the main reasons why people ought to be interested if they're not
You