Get exposure to gold, it isn’t as risky as some may think and deserves a place in your portfolio.
Gold can be a hedge against inflation and deflation
By Guy Avtalyon
Investing in gold whether own it as a metal, jewelry, mining stock or mutual fund is always a smart decision. This is especially true when the main currencies are dropping. There is one interesting situation that confirms the gold to be the most valuable asset. Gold is a benchmark for national currencies, for example. As the currency falls, gold will rise.
So, let’s highlight the chance of gold’s future.
Some may say that investing in blue-chips is better. Okay, it is still a good investment, yes. But is there a true potential for profit? Can blue-chips persist in the global market? They are mastodons. We are talking about them with respect but for most investors they are unachievable.
What is investing in gold?
Gold has a possibility for future growth. The “golden standard” is still live no matter what the banks will insist on. It was in the past, it is now, and it will be.
Traders-Paradise wants to highlight some opportunities for investing in gold and how to do so. Hopefully, you will find your way.
Why investing in gold?
Gold is respected everywhere in the world because of its value and bright history.
Gold’s history started in 3000 B.C but from 560 B.C. gold is used as a currency. The need of the ancient merchants was to use something broadly accepted in order to make trade simpler. Since the gold was universally accepted for expensive jewelry they recognized the potential in gold for valuing their products. And in trading, also.
A coin with a seal was accepted all over the world as value for products. Since then, this rare metal that comes back, when other currencies don’t work.
So, we can conclude that gold prices are negatively proportional to equity. Speaking about returns in long-term investments, gold isn’t so good because stocks or funds will always give better returns.
Gold returns in comparison to assets returns
Yes, the asset will always do better. But it can be volatile during the time.
Oh, wait! Gold is a volatile investment too.
Let’s look at some stats, like standard deviation. What is the standard deviation? It is a degree of how spread out numbers is. In the example of a stock price, it measures the volume of variability and dispersion around an average. It is a measure of volatility, also. Generally, dispersion is the difference between the current value and the average value. The larger the dispersion or variability means the higher the standard deviation. And vice versa, the lower figures are implying less price variability. Investors use the standard deviation to estimate the supposed risk and define the importance of specific price movements.
During the last five years, the annual standard deviation of gold was 16. The annual loss was about 4%. This means that the chance that gold will give a profit is about 12% and a loss of 20%. That represents a big range and falls into a negative area.
If we compare data for, let’s say the S&P 500, we will see that the standard deviation was a bit under 10, for the same period of five years and an annual average return was around 13%.
Let’s calculate again and we will see the range was between a gain of 23% and a gain of 3%.
Is gold volatile?
But, keep in mind, the higher volatility of gold is the standard, not the anomaly. As an investment, gold is risky. But, something very similar to the relationship with currencies arises.
Gold and stocks very rarely perform the same thing at the same time. Meaning, when the stock market lags, gold will be doing well. This doesn’t mean you shouldn’t invest in gold. Investing in gold ONLY is a risky position.
This synergy between stocks and gold is where gold is a good investment. Honestly, gold can be a very safe investment.
For example, the relationship between the entire stock market and the midcap over the past 10 years is about 0.98. Gold has a relationship with the stock market of 0.04 during the same period. Basically, gold creates its own game.
Is gold a good hedge against inflation
Historically speaking, gold has been a good hedge against inflation.
The price of gold will always increase along with the increased cost of living. If we consider how gold prices performed over the past 50 years, we could see that its price has been rising while the stock market has been falling during the inflation periods. Do you remember the relationship between gold and currencies?
When fiat reduces its buying power during inflation, meaning, you will need more units of money to buy anything. Also, gold is much more valued in money, and, therefore, gold price tends to rise. Furthermore, gold is a good store of value. People are more willing to buy gold when they think that their national coin is dropping in value.
But, should gold can be used as a hedge against inflation? In short, according to the mentioned above, yes.
Investing in gold as deflation protection
When the business operations decrease, the economy has excessive debt, and prices decrease too, we are speaking about deflation. The full deflation we saw last time was the Great Depression (1930). Part of deflation happened after the 2008 financial crisis. But it has happened in some parts of the world.
During the deflation (Great Depression), the buying power of gold rose while other assets’ prices fell. The most secure place to put cash in that time was gold. Today, we have a similar situation in some parts of the world.
A portfolio plan
Let’s explain this in the example from the recent past. During the recession from 2007 to 2009, the S$P 500 Index dropped 36%. But the gold price increased by 25%. Yes, it was extremely. But, can you see how good is to diversify your portfolio by adding gold? Even with the knowledge that gold is a volatile investment.
When you add the gold in your portfolio you will have that one that performs differently from the others. Gold will always act differently from bonds and stocks. That’s why many investors add gold to their portfolios. The recommended part is 10% of the overall portfolio in gold. That will create a good balance and good diversification of your investments. Moreover, you will provide the safety of the complete portfolio. By adding gold you will reduce volatility and risk. Moreover, investors are investing in gold as a safe haven during political and economic difficulties.
Investing to have the dividend
Gold stocks are suitable for growth investors, but a lot less for income investors. That is because the gold stock will change the prices along with the gold prices. But you can find well-managed mining companies, profitable even when the gold prices are falling.
Rises in the price of gold are often increased in gold-stock prices. A small rise in gold prices can lead to important gains in the gold stocks. Moreover, holders of gold stocks could get a much higher ROI than holders of natural gold.
Gold stocks that pay dividends tend to produce bigger gains. In periods when the whole industry is rising, they could be twice better than non-paying dividends when the market is in a downturn.
Investing in gold is possible in many different ways.
Today we have more investment options, such as futures, companies, bullion, coins, mutual funds, miners, jewelry, etc.
For example, gold can outperform stocks and bonds which has happened during a period of 45 years. But if we look at 30 years-period, stocks and bonds were better. If we evaluate 15 years-period gold has outperformed both stocks and bonds.
This is one angle of view. The other comes from gold’s ability to protect your portfolio and act as a hedge against inflation.
Anyway, it is smart to consider holding not more than 10% of the portfolio in gold. Choosing how to invest in gold includes analyzing the various gold-related investment products These investment products have various risks and return forms, liquidity components, etc. Consider how gold performs in a correlation with other assets.