Why You Should Be Investing in Gold Now

The glorious, precious yellow metal gold is something worth exploring this year, not to look ‘bling bling’, but for your portfolio. Gold is a unique asset, it is highly liquid and very much seen as a luxury good as much as an investment.

It can play a vital fundamental role in your investment portfolio. The yellow metal can be viewed as a diversifier, in addition to a vehicle to mitigate losses during market distress. Furthermore, it serves as a hedging tool against inflation as well as currency risk.

Gold has proven safe-haven qualities. During times of instability, investors who held the yellow were able to successfully protect their wealth and, in some cases, even use the commodity to escape from all the turmoil. Consequently, whenever there are news events that hint at some global economic uncertainty, investors will often buy gold as a safe haven.

Let’s look at some of the dangers that pose a potential risk to your overall portfolio this year. We will then explore some reasoning as to why gold should be added, as a precaution. All of which can be considered within a balanced portfolio.

Trade Wars

There is an ongoing trade saga between the two economic powerhouses; the United States and China. Back on March 8, 2018, President Trump announced a 25% tariff on steel imports and a 10% tariff on aluminum.

Trump at the time said, “Trade wars are good and easy to win.” The stock markets profoundly disagreed with this. Across the globe, equities tumbled in fear of this potential trade war between the world’s three largest economies.

Big Economies Slowing Down

There have been growing concerns about a slowdown in the world’s second largest economy, China. Last year, China experienced its slowest economic growth in nearly three decades.

Slower growth in China means slower growth for the rest of the world, as it accounts for one-third of global growth. Jobs, exports, commodity producing nations – depends on China to buy stuff from them. The country also recently announced a lowering in its goal for economic growth and introducing a significant tax cut.

Elsewhere, recessionary fears around the largest economy within the Eurozone, Germany. The country just about avoided falling into recession during the final three months of last year. They registered zero growth during the fourth quarter of 2018, according to their country’s Federal Statistics Office.

Brexit

Brexit appears to be a never-ending saga, as the U.K. continues to fail on a withdrawal agreement that would see its departure from the European Union (EU). This process so far has very much been far from orderly, as U.K. politicians cannot find it within themselves to find a consensus.

The country initially set a leave date of March 29, however, had to seek a small extension until April 12, with a scope of this being extended to May 22. All of which is subject to U.K. ministers’ progress on the withdrawal agreement.

Global Central Bank Warnings

Central banks globally have been stressing their concerns about threats of an economic slowdown. Several of them as a result of this are scaling back their plans of raising interest rates. Some banks have even been looking at or already started further stimulus measures.

The likes of the U.S. Federal Reserve, Bank of England, European Central Bank, Bank of Canada, Reserve Bank of New Zealand, Reserve Bank of Australia and the Bank of Japan are being forced to keep rates unchanged and low.

OK, so now we know several of the critical economic worries that are lingering globally. These are all enough reasons for us to look at adding gold to our portfolio as a method of a hedge against all of this risk.

Aside from the above detailed current economic concerns, there are various other reasons as to why gold should be held.

Holding Its Value

Historically, unlike physical currency, coins, and other assets, gold has been able to maintain its value throughout the years. Many people also see gold as a method of passing on and preserving wealth from one generation to the next. Gold has withstood the test of time unlike any other commodity or asset.

Inflation and Deflation Concerns

Gold has proven to be a reliable hedge against inflation, as the value of gold  tends to rise when the cost of living increases. For many years investors have witnessed gold prices soaring, in times where the stock markets have plunged during high-inflation periods.

On the contrary, when deflation creeps up within economies – a period of which prices decrease, a slowing is seen in business activity, and the economy has a burden of high debt – gold also outperforms. Do note however this extreme case has not been seen since the Great Depression of the 1930s. Gold within such conditions did also soar compared with other prices sharply falling.

Supply and Demand

The output supply of gold globally is noted to be slowing, with the reduction in gold supply resulting in an increase in its prices.

In terms of demand, this remains very much elevated, with the World Gold Council (WGC) having recently noted a 50-year high driven by large central bank buying amid a surge in Middle East gold and bar-coin demand. While supply/output is decreasing versus the jump in demand, gold prices, as a result, will continue to be supported in a move north because of this.

Portfolio Diversification

It is critical to find investments that are not closely correlated to one another, as an example – stocks and gold.

During times of economic crisis, which can be reflected in stock market crashes, gold tends to shine as capital flows from equities and into the precious metal. Cases of this have been seen historically, i.e. the crashes of the 1970, 1980s, 1990s and also the 2008-2009 financial crisis. Stocks dropped substantially, as consumers migrated over to gold.

Read more about portfolio diversification here.

In Summary

Gold may not be best just bought alone as an investment. Gold itself is still very much speculative and can see high peaks and lows. In a sense, this does make it somewhat too risky for the average individual investor. Over the longer-term, the value of gold doesn’t tend to beat inflation. However, owning gold is an integral part of a diversified portfolio.

Buying physical gold is ideally suited for investors who are looking for a mid to long term investment. It is a good idea for those that wish to secure a portion of their savings or investment portfolio against unforeseen or unpredictable changes in the economic climate. It does suit investors who have several more mainstream investments.

Featured image courtesy of Shutterstock.

Author:
Ken has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.