The virtues of gold as an investment asset
How can you preserve the value of your investments when everything seems to be falling apart? Gold is an indispensable ingredient in any diversified investment portfolio because of its long-term performance and liquidity.
Gold is the precious metal par excellence. Scarce and highly prized, it has been used for thousands of years to preserve wealth. And this has not changed in the 21st century, as it has appreciated in 16 of the last 20 years, according to Statista.
Three key characteristics make it an attractive asset for any investment portfolio: long-term profitability, as the data is positive if we analyse its appreciation over the last decades; its role in diversifying and reducing the overall risk of our investments; and its liquidity, as it can be easily bought and sold, even when conditions in other markets are difficult.
A shield against inflation
Gold generates relatively strong returns in all economic cycles. As the World Gold Council points out, over the past 50 years the price of gold has risen by almost 11% per annum on average. This is comparable to US equities and considerably better than US bonds.
Gold offers a good return in good times, when demand for gold in jewellery and technology increases. But its attractiveness grows especially in times of difficulty as it is seen as a safe-haven asset.
The World Gold Council points out that gold has appreciated by more than 20 % on average in periods with inflation above 5 %. According to data from this organisation, almost half (47 %) of the demand for gold in 2021 was for investment and more than 7 % went into the vaults of central banks.
The need to diversify
A golden rule, no pun intended, for any investor is not to put all your eggs in one basket. In other words, putting all your savings into a single asset class is very risky because it exposes you to the ups and downs of a single market. This is why it is recommended to diversify investments and include various types of assets in investment portfolios so that gains in some assets can offset unexpected losses in others.
Hence, gold’s great attractiveness as a complement to other assets, especially at times when equities and other riskier investments are under pressure. Portfolios that include gold are less likely to experience extreme ups and downs.
On the other hand, if we compare the evolution of the gold price with the US dollar and other currencies that have been used as safe havens, we find that in the 21st century the major currencies have depreciated by more than 90% against gold. And if we look further, we see that in the last 100 years the major currencies have lost 99% of their value compared to gold.
No liquidity problems
The third advantage of gold is that it is a very liquid asset. The value of gold bullion is closely linked to the world market price for unrefined metals, which is updated 24 hours a day and is accessible to buyers and sellers at all times.
Investors can buy and sell gold whenever they wish, even during periods of extreme stress in the financial markets. This is obviously not the case for other assets as art or antiques, for example.
Given all these factors, it is not surprising that the World Gold Council’s analysis has concluded that adding 6-10% of gold to the average US investor’s portfolio will tangibly improve their performance, with good long-term returns.
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