Gold is an investor’s best friend
Investment Adviser October 22, 2007
Gold has long been considered one of the most precious metals, and its value has been used as the standard for many currencies in times gone by. Gold, due to its rarity and durability, has historically been used as a method of payment and it is used today in the portfolios of fund managers and private investors alike due to its unique investment properties. In today’s sophisticated financial markets, investors seek exposure to gold for a range of reasons and have access to a variety of investment options suited to their profiles.
Most investment portfolios are invested primarily in traditional financial assets such as stocks and bonds. The reason for holding diverse investments is to protect the portfolio against fluctuations in the value of any single asset class. Portfolios that contain gold are generally more robust and better able to cope with market uncertainties than those that do not.
A league of its own
Adding gold to a portfolio introduces an entirely different class of asset. Gold is unusual because it is both a commodity and a monetary asset and is an effective diversifier because its performance tends to move independently of other investments and key economic indicators.
Independent studies have shown that a traditional diversifiers such as bonds and alternative assets often fail during times of market stress or instability. Even a small allocation of gold has been proven to significantly improve the consistency of portfolio performance during both stable and unstable financial periods. Gold improves the stability and predictability of returns. The performance of gold is not correlated with other assets because the gold price is not driven by the same factors that drive the performance of other assets.
In addition, gold is often cited as being an effective hedge against fluctuations in the US Dollar, the world’s main trading currency. If the dollar appreciates, the dollar gold price falls and similarly a fall in the dollar relative to the other main currencies produces a rise in the gold price.
In a recent study by leading metals consultancy GFMS, the strength of the link between 22 commodities and the US Dollar was examined. The results clearly suggested that not only is gold a more potent hedge against the dollar that other commodities, but also that protection is provided when most needed – when the dollar is losing value – with relatively little upside foregone during a period of dollar appreciation.
Risk-free alternative – Like all physical commodities, gold is an asset that bears no credit risk. Holding asset in the yellow metal involves no counter party and is no one’s liability. In addition to that, the physical properties of the metal make it an excellent alternative to money. Gold is durable. Unlike many of the other commodities examined, other things remaining equal – assuming there are no changes in price – there is no depreciation in the value of gold, other than and storage costs that might apply. Gold is fungible. It is, at least in theory, infinitely divisible with virtually no losses, other than any operational costs the process might incur. Furthermore, gold has a high value to volume ratio, which makes it easily transferable, with low transport and storage costs. Moreover, it is one of the deepest commodity markets with the highest levels of liquidity, second only to oil.
