In a fast-changing and uncertain world, investors are always looking to avoid risk. Stock market volatility, rising inflation, and currency declines are all factors that can negatively affect investments. However, well-diversified investment strategiescan help mitigate these risks.
Throughout history, people have looked for safe places for their investments. Gold has been successfully used to store wealth for thousands of years. Today, Trading 101 continues to recommend that gold be part of an investor’s diversification strategy.
Gold can help protect wealth, reduce risk, and offer future growth opportunities. Here, we examine why it is a valuable addition to many portfolios.
Gold is different from other types of investments, like stocks and bonds. It does not rely on company earnings, dividends, or interest rates. Instead, its value comes from its scarcity and universal appeal.
Throughout history, gold has been known as a “safe haven” asset. Investors tend to flock to it during times of economic stress. A prime example is the 2008 global financial crisis. While the S&P 500 index dropped by more than 30% between 2008 and early 2009, gold prices rose sharply. Starting at $800 per ounce in 2008, gold reached then-record highs at over $1,900 per ounce by 2011.
A further example occurred during the COVID-19 pandemic in 2020. As uncertainty shook global markets, gold prices climbed to an all-time high of over $2,070 per ounce in August 2020, according to the World Gold Council.
As these examples show, steady demand and limited supply mean that gold often keeps its value even when other assets fall sharply. This makes it a strong option for preserving wealth.
Diversification: Reducing Risk With Gold
Diversification is a key strategy for lowering investment risk and is used by many investors. The strategy involves spreading money across different assets to reduce the impact of large losses on any given investment type.
Gold plays a unique role in diversification because it tends to move differently from other assets. Studies from the World Gold Council show that gold tends to have low or even negative correlations with stocks and bonds. This means gold prices can rise when other investments fall. For example, during the financial crisis of 2008, gold prices went up while stock markets tumbled.
Experts often suggest having 5% to 15% of a portfolio in gold. This can significantly reduce overall portfolio risk, which is whymany financial advisors suggest including gold alongside stocks, bonds, and other assets.
Gold: A Shield Against Currency Devaluation
In times of economic uncertainty, currency devaluation is another risk faced by investors. When a country’s currency loses value, it can dramatically reduce the purchasing power of cash and other local assets. Emerging markets often face higher risks of currency devaluation. In these economies, local investors will often turn away from local currency to gold to protect their investments from rapid declines.
Gold is widely seen as a hedge against the risk of currency devaluation. Gold is not tied to any specific currency or government, and its value is recognized globally.
For instance, during periods of U.S. dollar weakness, gold prices typically rise. When the U.S. dollar index falls, gold becomes more attractive to investors worldwide, driving up its price. The World Gold Council’s historic data suggests that gold prices rise on average +14.9% per year in periods when the dollar is declining, but only fall by around –6.5% per year when the dollar is strengthening.
Recent market data also highlights a strong inverse relationship. Since 2020, the Dollar Index (DXY) and gold have exhibited a correlation coefficient of around –0.7. This indicates a robust negative correlation.
Hedging Against Inflation With Gold
Over time, inflation can erode the value of savings and investments. When the cost of goods and services rises, the purchasing power of money shrinks.
Historically, gold is an effective hedge against inflation. According to Statista, gold prices surged during high-inflation periods such as the 1970s. In that decade, gold prices rose from around $35 per ounce to over $800 per ounce as inflation in the U.S. soared.
More recently, with global inflation hitting multi-decade highs in 2022 and 2023, gold once again proved its value. Strong demand from investors looking to protect their wealth is commonplace during uncertain times. Unlike some other assets, gold tends to retain its purchasing power over the long term.
Easier Access to Gold Leading to Growing Demand
Demand for gold continues to grow worldwide. According to the World Gold Council, global gold demand in 2023 reached over 4,700 metric tons, driven by both private investors and central banks.
What’s more, market forecasts suggest that gold could see up to 20% annual price growth in the near future. This is driven by persistent inflation concerns, ongoing geopolitical risks, and high levels of central bank gold purchases.
This combination of easy access and strong growth potential makes gold appealing. In the past, buying gold often meant visiting physical dealers. Today, digital platforms have made investing in gold easier than ever before.
Easy-to-use gold trading platforms, like this buy gold app, allow investors to buy and sell gold online. These apps and online platforms let users trade gold on the go, track live prices, and manage their positions through their phones or computers.
Physical gold remains popular. Many investors appreciate holding something tangible, despite the added costs of storage and insurance. Online bullion dealers can deliver gold to your door.
All this makes investing in gold much more accessible to investors wherever they are.
Gold Crucial in Any Investment Strategy
Gold is a key pillar of a balanced investment strategy. Its ability to retain value during market crises, protect against inflation and currency declines, and reduce overall risk makes it a reliable asset for investors worldwide. With strong demand and forecasts pointing to continued growth, gold serves both as a safeguard and as a potential source of returns.
Today’s technology has made investing in gold simpler than ever before. Whether through digital platforms, gold-backed ETFs or physical gold, investors have many choices.
