Diversify a portfolio with gold and infrastructure
In an environment of continued macro uncertainty, we believe gold could function as a viable alternative in investor portfolios. Our analysis shows that a small addition of gold in a portfolio could boost its Sharpe ratio for 1- year, 3- year, 5- year and 10- year time periods.23
Gold may also be used as a hedge against monetary debasement and fiat currency risks. Historically, government debt levels have shown a positive correlation with the price of gold.24 Rising deficit levels across many developed economies, particularly in the U.S., have raised concerns about currency stability, making safe-haven assets like gold more attractive. (Learn more about U.S. deficit dynamics.)
In addition, global central banks, which own nearly 20% of all physical gold ever mined, have significant influence on gold demand.25 Rising geopolitical uncertainty has prompted these institutions to bolster reserves, with Asian countries being particularly strong net buyers.26 We expect this trend to continue given the potential for them to diversify away from the U.S. dollar given more aggressive trade policies.
Besides gold, public and private infrastructure can also potentially bring portfolios diversification benefits. Over the past 17 years, public infrastructure has offered investors stable returns and a low correlation to other traditional asset classes, with added liquidity benefits compared to private infrastructure.27 In addition, long-term mega forces such as AI datacenter and sustainable transitions speak to the attractiveness of infrastructure as a strategic allocation for investors.
Diversify a portfolio with cash alternatives
Cash can be another alternative asset class to consider in a highly volatile environment. Cash-like alternatives, such as short-term bonds, have typically been less sensitive to changes in interest rates and equity market uncertainty – consider, short-term bonds, on average, have had a lower correlation to stocks.28
Cash-like strategies diversify portfolios away from near-term ups and downs by seeking to preserve investment. By parking cash in a lower risk asset, investors can later deploy it in places that may be attractive when market conditions support.
Figure 11: Cash-like exposures help bring down overall portfolio beta relative to the S&P 50029
