For small savings or a more substantial long-term investment, buying gold protects wealth and can increase risk-adjusted returns. Having a small amount of gold within a balanced investment portfolio can potentially reduce its overall risk, helping to protect against market shocks.
While it is reassuring to have a physical asset of enduring value, investors buy gold for many other sound financial reasons. We have outlined some of the core reasons why investing in gold could be a good investment for you.
Gold helps protect the value of money.
Gold is a tangible asset which cannot be printed at will. As such, it protects against inflation and currency devaluations. For example, in 1971, a family in the US could buy a house with US$25,000. Today, US$25,000 is not enough for a mortgage deposit. By contrast, 700 ounces of gold (the equivalent of US$25,000 in the 1970s) can buy a US$1 million property today. A growing body of research has shown that having a portion of savings in gold can improve purchasing power over the long term, especially as the real value of most major currencies declines.
Gold performs under pressure
In turbulent times, gold is resilient. The amount of available gold is constrained and cannot be expanded at will. Fiat money however is often increased through expansionary monetary policies – especially in times of financial and economic crisis. Moreover, gold has no credit risk in contrast to a stock for example, where the underlying company can go out of business, or a bond, where the issuer may default on a coupon or redemption payment.
The long-term outlook for gold is strong
Demand for gold continues to outstrip supply. Most gold is bought in the world’s fastest-growing emerging markets. China and India account for more than half of total consumer demand, annually. With demographic and economic trends predicting increasing wealth and expanded populations in the world’s two largest gold markets, gold demand has the potential to continue rising.
Gold is a hedge against inflation
Inflation rates in major developed and developing economies are expected to rise, in part as a consequence of the financial crisis and subsequent mitigating actions such as quantitative easing. Historically, gold has been a hedge against inflation. It has retained its value through geopolitical shifts and market turbulence, outperforming most major currencies and many real assets.
It is an effective balance against currency risk
Typically, gold is not correlated to other major asset classes, and is negatively-correlated to the US dollar. It can be used effectively to manage currency risk in an investment strategy.
Both highly liquid and highly tangible
Unlike many other assets, gold is a physical asset that an investor can own outright, and that can be traded 24/7 around the world at low price spreads. Physical gold is entirely free of any credit risk, and of counterparty risk.
Institutions: Asset Allocation Strategies
Gold has experienced significant price appreciation in the last decade, and investors have taken advantage of rising prices. However, gold’s most compelling benefits derive from its lack of correlation with other asset classes, making it a valuable tool for portfolio diversification and risk management in an asset allocation strategy.
Gold’s sources of demand are geographically diverse and range across a number of unrelated sectors, from jewellery and technology to the financial markets.
This diversity of demand means that gold is normally not correlated with many of the assets that make up a typical investment portfolio. This makes it a valuable tool for portfolio diversification which stands well during stable and unstable financial periods.
Gold typically has an inverse relationship with the US dollar and many other developed-markets’ currencies. This makes it a valuable hedge against short- and long-term fluctuations in the value of major currencies. Because it normally also holds its value against major currencies, gold is also effectively used as an inflation hedge.
Investors can use gold to reduce portfolio volatility, minimise losses during periods of market shock, and serve as a high-quality liquid asset when selling other assets would incur large costs or losses.
Gold is virtually indestructible, meaning that nearly all of the gold ever mined still exists today. Much of it is in tradable form, meaning that sudden excess demand usually can be satisfied relatively easily. Unlike debt instruments, investments in gold do not depend on an underlying company or sovereign which can default.