Remember, There Are Many Reasons To Own Gold
While the gold market languishes quietly around the $1,200 per ounce level, the chart pattern has improved in recent weeks. Higher daily highs are seen on the chart as Asian buying interest supports the yellow metal on price declines.
For western investors, however, it is useful to take a look at the many different factors that can support the gold market. Traditionally, of course, gold is a safe-haven investment and a vehicle to preserve wealth and retain purchasing power. It is an inflation hedge, an insurance play against geopolitical risks, including severe economic dislocations or even war. It is a quasi-currency and is used to hedge against declines in the value of paper currencies.
As part of an overall investment strategy, gold can be an important portfolio diversifier. "A diversified portfolio that contains gold will do better over the long term because adding gold to a portfolio will reduce the volatility of the total value of your wealth without our reducing your return," said Jeff Christian, managing director at CPM Group.
The long-term correlation between gold and the Dow Jones Industrial Average is virtually zero, Christian noted, which makes it a good diversification tool.
"Physical gold provides important non-correlated diversification within a well balanced portfolio. In fact, gold is unique in that it is the only primary asset that is not simultaneously someone else's liability. An allocation to gold has been shown to protect and enhance returns, while reducing volatility," added Peter A. Grant, chief market analyst at USAGOLD.
Gold has also performed well across differing macroeconomic environments. "Gold is indeed the classic inflation hedge, but it has performed well in periods of deflation —1930s, disinflation —2000s, and stagflation—1970s as well," said Grant.
Gold also has properties to retain purchasing power, especially during times of rising inflation. Gold tends to rise as consumer prices increase, which means as cost of living jumps so does the value of one's gold holdings. "Inflation is often the result of currency debasement, and gold generally maintains an inverse correlated to the dollar. As the greenback devalues, the dollar price of gold rises," Grant noted.
Looking back in recent years, from 2001-2014 the annualized return for gold is just over 12 percent, Grant said.
How much could investors consider allocating toward gold? "As a general rule of thumb, we recommend an allocation somewhere between 10% and 30%," concluded Grant.
By Kira Brecht, Kitco.com |
