(Newswire.net — August 29, 2022) — Gold has become one of the most talked about assets this year. As the world heads for 1970s stagflation, with stagnant economic activity and high inflation, real assets such as gold have shown immense strength since last year. Over a millenia, gold has proven itself as a reliable hedge against uncertainty and inflation.
Hedge Against Inflation
Gold is a traditional hedge against inflation. When inflation strikes, the price of real assets such as gold rises, and real assets outperform stocks. Inflation has risen since the end of the first lockdown period. Data from the World Gold Council shows that the gold spot price has shot up nearly 40% in the last 3 years, in response to rising inflation.
Source: World Gold Council
In that time, the S&P 500 has grown by 42%. With inflation causes rising, stock markets have become highly volatile, equity indices across the world have declined, and the gold spot price has risen. In the coming months and years, we should expect gold to outperform the market.
Diversification
The world’s largest asset manager, BlackRock believes in using gold to diversify portfolios. This is because there is a low correlation between gold and equities, so in periods when equities are down, gold is likely to go up. Gold is a strategic asset given the long-term persistence of central bank policies and deficits.
Investors not only invest in physical gold or physical-gold exchange traded funds (ETFs), they also invest in gold companies, who have over recent years returned cash to shareholders in the form of dividends, at high levels. This provides a steady income stream to investors. This is important given that many growth firms do not typically pay dividends. This adds another level of diversification to a portfolio.
Retirement Planning
Many gold investors are attracted by the long-term stability of gold. They invest in the asset directly through bullion, coin, or even jewelry, or, through gold ETFs, or gold IRA companies, the latter two which take care of the costs and logistics of holding physical gold.
Gold’s stability is important for de-risking a portfolio. Although it is important to have equity exposure, the greater volatility of equities can hurt portfolios in downturns and push back retirement plans. Having gold in the portfolio provides that level of security that retirement-oriented portfolios need.
Speculation
Every asset can be used for speculation, and gold is no different. Investors have used gold to speculate based on what they believe the economy is going to do, or whether they believe the supply-demand economics of gold entail a shortage or surplus of gold and therefore, a rise or fall in the price of gold. Remember, investors can make money either when the price goes up, or when it goes down, depending on that investor’s strategy.
So, for instance, if investors believe that there is an excess of gold in the market, that tells them that the price is likely to fall until that excess gold is cleared, whereupon it will rise in response to the new shortage in gold.This is known as the “capital cycle” and investors can profit from it.