Gold: The answer to a 20 year challenge

Mckinsey Global released a fascinating piece of research last week, looking at why returns are going to be so hard to come by in the coming two decades. “Why investors may need to lower their sights”, looks at the extraordinary performance of financial markets in the last thirty years, describing them as a ‘golden age’ for investors, before noting that those returns were significantly higher than the long-term average.
This three decade era of strong performance, its relationship with longer-term norms, and the outlook for investing in the decade ahead are captured brilliantly in the following chart, which looks at equities and fixed income markets in both the United States and Europe.

As you can see, the past 30 years have been very kind to those invested in financial markets (as well as those managing money on behalf of investors), with stocks and bonds generating real returns between 5 and 8%.
 
That is of course a substantial outperformance relative to the pace of economic growth in these regions.
But as per the chart, the future is unlikely to be anywhere near as rosy, with projections for the next 20 years ranging between 6.5% for equities, to 2% for bonds, which is optimistic, according the authors themselves, based on a ‘growth-recovery’ scenario.

Return projections in an era of slow growth are even worse, and even these could prove ‘optimistic’, should GFC Mark II (or III) ever rear it’s ugly head.
Considering 99% of investment portfolios are concentrated in equities, fixed income, or other assets that are either highly correlated or dependant (or both) to these two, we feel its highly unlikely that the average investor will be able to grow wealth in financial markets in the coming years by simply following the crowd.

Gold, as a highly liquid, zero credit risk with a track record of negative correlation to financial assets, will continue to gain popularity in the face of such challenges.
To read the summary to the Mckinsey report, click here
 
Jordan Eliseo
Chief Economist

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