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Physician-Investor Outlook

This column is prepared by Doug Holthaus, vice president and relationship manager at PNC Wealth Management. He can be reached at 410-237-4590 or douglas.holthaus @ pnc.com.
This column is prepared by Doug Holthaus, vice president and relationship manager at PNC Wealth Management. He can be reached at 410-237-4590 or douglas.holthaus @ pnc.com.

Twenty-First Century Gold Rush
old has long been treasured as a store of value due to its beauty, and because there is a finite amount in existence as opposed to the possible unlimited printing of fiat currency. So should investors transmute some of the investments in their portfolios into gold? Our view is that investors by and large should focus on retaining and growing purchasing power. This leaves us with the key question for investors: Is gold really an effective hedge against inflation?

It appears safe to say that even under the very generous definition of a decade as “short term,” gold has provided a poor hedge against inflation in the short term. Investors in gold would have actually lost purchasing power in both the 1980s and 1990s. To emphasize the devastation using a specific example, consider that investors who purchased gold at the beginning of 1982 and held it until the end of 1999—a period nearly twice that generous definition of short term—would have lost 59% of their real purchasing power.

Gold does appear to act as a long-term inflation hedge, since it retains its value relative to inflation over a long investment holding period. While gold has provided inflation-adjusted real returns over longer time periods, the results are not very compelling. The standard deviation of returns from gold over about the past 60 years has exceeded that of stocks, so on that basis the historical risk-adjusted returns are not attractive. Those buying gold in a quest to avoid the nasty price swings seen in stocks could be disappointed if history is any guide.

While we can’t say what the future holds for gold, we suggest that investors resist the current gold rush in favor of alternative hedges—domestic equity, international equity, alternative investments, and Treasury Inflation-Protected Securities—against the long-term impacts of inflation. In fact, investors should not be myopic in terms of focusing solely on inflation risks because there are multiple considerations in building an effective investment portfolio. Investors should also keep in mind their future goals, liquidity considerations, income needs, and risk tolerance. In that respect, a well-diversified portfolio with an asset allocation selected to match the investor’s needs is the best choice in our view.

The economic outlook is now for recovery and should provide a constructive backdrop for the markets. Despite the above reasons to be optimistic regarding future stock market returns, we remain mindful that significant challenges remain, given the baggage left over from the financial crisis. Our current recommended allocations attempt to reflect the more positive tone, while being mindful of the continued risks inherent in the market and economic outlook. Alternative asset classes should also be considered for qualified investors because they might provide an effective risk management tool for portfolios.

 

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