Are you thinking about diversifying your investment portfolio? Should you diversify your portfolio with gold?
Adding gold to an investment portfolio can effectively enhance diversification and act as a hedge against inflation, currency devaluation, and economic uncertainty.
This is primarily due to its historically low or negative correlation with traditional assets like stocks and bonds, meaning it often maintains or increases its value when other investments are struggling.
Key Benefits of Diversifying with Gold
- Risk Management and Reduced Volatility:Â Gold serves as a robust risk-management tool. When stock markets experience significant drawdowns, gold has historically outperformed and helped mitigate overall portfolio losses and volatility.
- Hedge Against Inflation: As a tangible, finite asset, gold tends to preserve its purchasing power over time, particularly during periods of high price inflation (above 5% annually), when the value of paper currencies erodes.
- Safe Haven Asset:Â In times of geopolitical instability, financial crises, or general economic pessimism, investors often flock to gold as a “safe-haven”. This increased demand can drive up its price, providing stability when other markets are in turmoil.
- Source of Liquidity:Â Gold is a highly liquid asset, meaning it can be easily converted into cash if needed, a beneficial characteristic during periods of financial stress when quick access to capital is essential.
- Independent Performance Drivers: Gold’s performance is driven by its own market fundamentals (jewelry, technology, central bank, and investment demand) rather than solely by the fluctuations of equity and debt markets, which further contribute to its diversification benefits.
How to Invest in Gold
Investors have several options for adding gold to their portfolio. However, we prefer physical metals, not paper contracts. Holding physical metals reduces several risks we are concerned about. The exception we may take is a precious metals IRA.
- Physical Gold:Â Buying gold bars, coins, or bullion offers tangible ownership and a sense of security.
- Precious Metals IRA: Investing in Gold and Silver in an Individual Retirement Account is for many a great way to save, receive the tax advantages, and, of course, own the metals.
Recommended Allocation
Financial advisors generally suggest a modest allocation of 2% to 10% of a total portfolio to gold and other precious metals. We strongly believe this allocation is insufficient in our current economic conditions and concerns over our financial system. A portfolio allocation to be correct must be determined on an individual basis, not in a general article such as this.
