By Kitco News
Tuesday October 25, 2016 11:28

(Kitco News) - Gold can play an important role for investors in a world that continues to face low and negative interest rates, according to one renowned economist.

Photo courtesy of the IMF: Mohamed El-Erian, Allianz's chief economic adviser.

In an interview with the Wold Gold Council, in it Gold Investor, fall edition, Mohamed El-Erian, Allianz's chief economic adviser, said that in this current investment environment, a 5% strategic allocation in gold “is appropriate.”

“As part of a diversified portfolio allocation that includes a higher-than-usual cash allocation, gold can play an important role in overall risk mitigation. It can also provide a notable upside should the enormous amount of central bank liquidity injection gain traction and result in higher inflation, be it actual or expected,” he said in a question-answer session.

“A growing number of investors are recognizing the potential of gold to increase returns and improve risk-mitigation attributes of well-diversified portfolios. At the same time, there are – understandably – growing worries about the over-valuation of public equities and fixed income, thereby strengthening the case for an appropriately-sized allocation to gold,” he added 

However, he also cautioned investors that their gold allocations should reflect their own risk tolerance as the market can be fairly volatile.

The prolonged period of low and negative interest rates has pushed the global economy into unchartered waters, he said, which is presenting real risks for investors. Along with gold, he said that he is recommending investors hold bigger cash positions.

“Ultra-low interest rates entice investors to stretch much more for returns. Combine this with repressed financial volatility, another objective of unconventional central-bank policy, and you could well end up with excessive risk-taking on the part of too big a portion of the investor base,” he said.

While low interest rates are increasing risks for investors, it is not the only threat to financial markets. El-Erian said that he sees three factors that are weighing on advance economies growth: political polarization, which is delaying the implementation of comprehensive pro-growth structural reforms; growing income inequality that is reducing the probability of good economic governance; and current economic and financial systems that are excessively borrowing future growth.