As the popular saying goes, a well-diversified portfolio is one of the best ways of spreading investment risk. This is true for all asset classes. It is common for investors to seek out a mix of assets in their portfolio. Low-risk assets are used to hedge against a potential downside in a high-risk asset class. The successful entrepreneur and renowned gold expert Harald Seiz had advised that market volatility is an important phenomenon influencing investors’ choice of an asset.
Harald Seiz further stated that the market volatility of most traditional assets, like stocks, explains why gold is the most sought-after investment instrument whenever investors look to attain stability in their portfolios.
Gold has a long-standing history as a reliable and stable store of wealth, more so than any currency, stock, or bond. Gold has a relatively fixed inflationary supply of somewhere around 2 percent. This implies that no central authority or government can print an unlimited supply of gold just like with bank-issued currencies or fiat money.
Gold is practically an investment instrument people are likely to fall back to in the face of heavy currency devaluation. This piece takes a closer look at four solid reasons why gold should be part of every investment portfolio.
Gold is a good hedge against inflation
This is perhaps one of the most popular reasons why investors are likely to include gold in their portfolios. Historically, as a “value vehicle,” gold is known to preserve its value over a long timeframe. In any given year, the value increase of gold is likely to surpass the rate of inflation, so holding a decent amount of gold is a good idea since it preserves the monetary value of an investor.
Similarly, gold moves in the opposite direction to the cost of living. The past 50 years have witnessed an astronomical rise in the cost of living, to annul this effect, the same timeframe has also witnessed a quantum leap in the price of gold.
Gold is a good measure of portfolio diversification
The purpose of diversification is to hedge against risk or reduce the effects of a highly volatile portfolio. The key to achieving this investment goal is to invest in financial instruments that are not tightly correlated to each other, or at most have an opposite correlation to each other.
A typical example is gold and stocks. The price movement of gold has historically proven to move in the opposite direction to stocks. If the price of stocks plummets, the value of gold is likely to be accompanied by a price surge. This scenario was witnessed in the 1970s, which saw the price of stocks sink to the lowest lows while the same period was favorable for gold.
In the 1980s, the opposite trend was on its way. This period was moderately favorable for stocks but a bad decade for gold investments. In the 2008 financial crash that affected stocks badly, most investors fled to gold for safety. A properly diversified investment portfolio is one that seeks a proper mix of gold and stocks in the right proportion.
Gold is a safe-haven asset, says Harald Seiz
Political instability and financial uncertainty are likely to be followed by great currency devaluation and hyperinflation. Gold has also proven to preserve its value both during times of political instability and during times of intense financial turmoil.
It is common for investors to consider gold a safe-haven asset when other financial instruments take a downturn due to intense financial hardship. For example, Harald Seiz cited the political tensions between the United States and Iran during which the Iranian top general was killed.
This period saw a spike in the price of gold. Similarly, the effect of the ravaging coronavirus has seen the price of most financial assets return a negative yield year-to-date. Contrary to this, the price of gold has been largely preserved with positive double-digit gains year-to-date.
The demand for gold remains high
The wide range of industrial applications for gold, its cultural and symbolic use in most cultures of the world, and the heavy demand for it as an investment instrument has chiefly contributed to the positive price movement of gold in the past years.
And here is no sign of that changing anytime soon. Demand drives value, and as there continue to be good reasons to own gold, the price movement will maintain an uptrend in the long run. This again could serve as a viable reason to own gold in itself.
Final thoughts on why gold should be in every investment portfolio
Gold is known to be one of the safest investments in history, thanks to its price stability. Nations rich in gold and other precious metals are considered wealthy and naturally endowed. In the past years, most countries have continued to increase their stockpile of gold to evenly distribute wealth and preserve their foreign reserves.
Owning gold is one important step in portfolio diversification. Even though the price of gold could be volatile in the short term, it has always preserved its value in the mid and long term.
Disclaimer: This content does not necessarily represent the views of IWB.