Gold’s historically low correlation with stocks and bonds makes it a prime hedge against market risks, recommended for a strategic portfolio allocation of 2 to 5 percent, a market strategist said.

Speaking on an upcoming episode of the Relative Return podcast, Robin Tsui, APEC gold strategist at SSGA, said this strategic allocation can significantly improve portfolio stability and improve risk-adjusted returns amid market uncertainty.

Year-to-date, gold prices are up about 22 percent in Australian terms, supported mainly by three factors, Tsui said.

The first factor is a significant increase in central bank purchases, particularly noticeable among emerging markets such as China, India and Turkey. These banks are expanding their gold reserves to hedge against currency risks, viewing gold as a stable asset compared to fiat currencies.

The second reason is the strong investor demand for gold, especially in APAC among both institutional investors and intermediaries. This trend correlates with the last reason – the rise in geopolitical risk, which has prompted increased purchases of safe havens.

In particular, this third factor is expected to continue to push gold prices higher.

"What we're seeing in the tail risk events and also the market risks that we expect to see in the coming months because of the election and we're finding that in the specific devaluations in the U.S. are also becoming quite stretched." So we have, especially investors who are becoming more concerned about potential corrections in global stocks, gold can actually protect allocations to stocks and bonds,” Tsui said.

“So we recommend a little strategic allocation of gold in a portfolio because gold can actually interact with some of the asset classes that the average investor might have. We recommend about 2 to 5 percent of the strategic allocation in the portfolio, and this will significantly reduce the volatility of the overall portfolio and potentially improve the portfolio's risk-adjusted returns.”

Historically, Tsui explained, gold has produced annualized returns close to 8 percent since 1971. thus far, putting it on par with the performance of global equities and underscoring its potential for capital appreciation.

"Some investors don't realize the potential for capital appreciation, but during market downturns gold can actually provide that diversification benefit," he said.

Tsui also emphasized that during market downturns, gold has demonstrated its diversification benefits, with its price typically rising by around 5% when the S&P 500 suffers a decline of more than 10%, making it an increasingly attractive option on against the backdrop of rising market risks and global tensions.

"I think that's why investors are moving more into gold, they're getting more interested because the risks ahead, they can probably anticipate that there's going to be more tail risks going forward because, as I mentioned, the market risks, tensions around the world as well,” Tsui said.

Maja Garatsa Djurdjevic

Maya's career in journalism spans more than a decade in finance, business and politics. Now an experienced editor and reporter in all elements of the financial services sector, before joining Momentum Media, Maya reported for several established news outlets in South East Europe, looking at key processes in post-conflict societies.