Building a Balanced Portfolio
Financial analysts frequently advise their clients to diversify their portfolios to minimise risks. This strategy has been employed since the concept of an investment portfolio first came into being. Diversification takes on many forms, including ETFs, Mutual Funds, Stocks, Roth IRAs, 401ks, CDs, Real Estate, Cash, Binary Options, Commodities and Indices. Within this broad agglomeration is the world’s most important safe-haven commodity, gold.
Traders who maintained a stocks-heavy portfolio in 2007/8 soon found themselves on the back foot following the dramatic collapse of the global markets. By 2013, the recovery was well underway and stocks once again gained favour among investors. Savvy investors were wise enough to divert their resources from stocks to gold in 2008 and 2009, and as a result they enjoyed substantial improvements in their financial portfolios.
Gold, Stocks and Economic Uncertainty
To be fair, the price of gold and the price of stocks are not directly correlated. While the relationship is not cast in stone, there is strong empirical evidence to show that as stocks perform well, gold performs poorly (and vice-versa). In 2008 in particular, the S&P 500 Index plummeted while gold yielded positive returns. Another important positive correlation exists between the strength of the U.S. dollar and the price of gold. As the dollar gains against other currencies, the price of gold falls.
The flip side of the coin is also true: if the U.S. dollar weakens, then investors will flock to gold in search of a safe-haven investment. This has the effect of increasing the demand for gold which then increases the price of the precious metal. Central banks tend to hold on to gold as a store of value and to secure their asset holdings. The more gold a country has, the more that country is able to stabilize its economy during times of economic uncertainty. This raises the issue of when to invest in gold. Is anytime a good time to buy gold stocks, bullion or ETFs?
Gold Shines during Geopolitical Uncertainty
The answer to this question is complex, since everyone has a different appetite for risk and a different perception of where the market is currently at. What is true is that during times of economic and geopolitical uncertainty there is a much greater likelihood that gold comes into favour. It is precisely during times like this that investors scramble to shore up their portfolios with investments in gold. Numerous instances abound, including the Ukraine crisis, the Swiss franc and the euro, dollar weakness against the euro, and the ongoing Mideast crises.
And when it comes time to invest in gold bullion, there are several available options. The traditional form of investment – gold coins and gold bars – is not very practical, nor is it very safe. Investors would either have to bury the gold, rent a safety deposit box at a bank, place it in a personal safe, or run the risk of having the gold stolen. The other option which is used by the vast majority of traders and investors takes the form of gold exchange traded funds (ETF). Among the many benefits of such investments are the low costs and the speed with which these assets can be converted into cash. Employer retirement plans typically avoid exposure to gold, but including gold in your financial portfolio is easily done.
Is Future Growth Based in Gold?
There is a school of thought, and a big one at that, which believes that the world economy will always find stability and value with gold. Even though the ‘gold standard’ was abandoned, there is a pervasive feeling that it remains to this very day. One of the mistakes that gold traders make is they buy at retail prices and sell at wholesale prices. Other options for investing in gold include gold options and futures, and junior gold stocks.
Many investors believe that the U.S. dollar will inevitably not be able to maintain its position of dominance on the global stage. With mounting levels of national debt and increasing demands on government, it is likely a matter of time before the problems come to bear on the U.S. economy. It is against this backdrop that investors are concerned about the long-term prospects of the USD. Across the Atlantic, the Chinese have also hitched their wagon to the greenback. The domino effect that may one day arise as a consequence of this will have savvy investors scrambling for cover and gold is precisely where they will find it.
What makes gold something that investors can bank on is its tangible nature. Unlike currency which can simply be printed ad infinitum, there is only a limited and finite amount of gold in the world. This makes it inherently valuable. Monetary policy aside, there is real merit in gold as part of a healthy portfolio. Nowadays, currencies are not backed up by anything. Quantitative easing policies in Europe are simply flooding the markets with excess euros in an effort to drive consumer spending. This should prop up the dollar and deflate the euro, but short-term the opposite has occurred. What is absolutely certain however is that gold will retain its shine well into the future.