In the wake of trade wars, economic uncertainty, and volatile markets, investors will be looking for ways to secure their wealth. One of the best ways to do this is by diversifying their portfolios.
But what should you diversify it with? As we’ve covered on Market Chameleon previously, the answer is gold. The yellow metal has a number of advantages that make it attractive in trying times. In this article, we will be looking at a few reasons why you should invest in gold to diversify your portfolio.
It’s always been valuable
In contrast to things like fiat currencies and other assets, gold has remained valuable throughout history. It doesn't corrode and has unique properties that make it attractive. Investopedia lists these as just some of the many reasons to own gold, noting that some people even view the precious metal as something they can pass down and use to preserve wealth from generation to generation.
A weakening U.S. dollar
In contrast, the value of the US dollar has changed throughout history. In an article by The Balance on the value of the currency today, economic analyst Kimberly Amadeo points out that since 1913, the dollar has plummeted. At that time, $100 could buy what today would be worth roughly $2,529. By 2018 the dollar’s value decreased to almost half of what it was worth in 1990. Even as recently as 2010, what you could buy with $2,529 today would have only cost about $2,211 back then.
Of course, inflation has a huge role to play here. Currently, the Federal Reserve targets a 2% core inflation rate, which is a healthy rate for an economy. Although a certain amount of inflation is a good thing, it’s also worth noting that the dollar would be worth much less if it weren’t the world’s reserve currency. Still, that doesn’t make it immune to declines stemming from trade deficits and a surplus in the dollar supply.
In turn, declining dollar values make investors flock to gold. This was evident when the price of gold saw an increase close to 300% between 1998 and 2008, the same time that the dollar fell against other leading currencies. Gold even hit the $1,000-an-ounce mark in early 2008, when the US was in the midst of the Great Recession. Today, gold prices have reached a six-year high, sitting at $1,418 per ounce. Thus, gold has shown its capacity to withstand what the dollar could not.
Gold vs. stocks
Given the above examples, it is clear that gold traditionally performs well when investors are nervous. That is certainly the case these days, as CNN reports how a turbulent stock market has only allowed gold to shine even brighter. Since the beginning of October last year, the price of gold has gained as much as 8% while the S&P 500 plunged 14% during the same period. The idea then that gold is a safe option is also supported by FXCM who describe how the yellow metal offers perceived stability, unlike stocks whose growth hinge on the performance of the company they were invested in. Additionally, gold is largely immune to the global political turmoil that negatively affects the stock market, all the more reason to include gold in your portfolio.
Finally, another reason to include gold in your portfolio is because of its finite supply. The annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. While more recent years have seen a slight rebound in production, it can take up to a decade for a new mine to come into production. Combined with higher demand from growing gold-consuming nations like China and India, there is perhaps no better time than now to get your hands on the precious yellow metal.