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Gold Vs. Real Assets: ETF Securities Looks At How To Play These Markets

Nearing its ninth year, the equity bull market is looking long in the tooth and now could be time for investors to diversify into relatively inexpensive real assets, according to one investment firm.

In a recent report, ETF Securities highlighted four categories of liquid real assets: precious metals, commodities, master limited partnership (MLPs) and real estate investment trusts (REIT).

While these assets can play an important role in a portfolio, Maxwell Gold, director of investment strategy at ETF Securities, said that they aren’t all created equal.

“I would put precious metals and commodities in a risk management bucket and real estate in a capital preservation category,” he said. “In broad terms -- depending on your risk profile -- a 5% to 10% allocation in precious metals makes sense and a 10% to 15% allocation in real estate would be part of a balanced portfolio.”

In the current environment of overvalued equities, it might be more prudent to have a heavier weight in precious metals and commodities as they have a lower correlation to equities than REITs, said Gold.

In its report, the firm noted that REITs have a more than 0.5-point correlation with the S&P 500, commodities in general have a 0.3-point correlation with the broad market index and gold has the lowest correlation at 0.1.

“At the end of the day, REITs are equities, and if equities are down 20% or 30% you are going to suffer in this space,” he said.

At the same time, investors who are interested in protecting themselves from potentially higher inflation, might want to have a heavier weight in commodities or at least industrialized precious metals like silver, platinum and palladium.

ETF Securities noted that commodities have the highest correlation to the Consumer Price Index.

The report added that aside from working as inflation hedges, real assets are significantly undervalued compared to the S&P 500.

Commodities have a 31% discount to the broad market index, followed by MLPs at 29%, precious metals at 21%, and REITs have a 15% discount to the S&P 500.

“Real assets provide an inherent hedge against financial markets because their value is linked to a physical asset or property and not to a financial or paper claim on wealth as is the case for most stocks, bonds, cash, and currencies,” the firm said in the report.