Why should I buy Gold?

Gold is considered by most to be a good foundation asset for most long-term savings or investment portfolio structures.

The history of gold as an investment, goes back centuries and especially during times of financial uncertainty, has meant that investors often seek to protect their capital in assets that act as a ‘safe-haven’.  Viewed as a strong ‘wealth preserver’, gold’s stability in uncertain financial and political times means it remains a top priority for today’s shrewd investor.

As gold is one of the very few financial assets that do not rely on an issuer’s promise to pay, this places gold as the ideal asset in which you can move away from any widespread default risk. It is a proven way for investors to manage the risk of any extreme movements in the value of other asset types.

Some of the main reasons for the recent and widespread upsurge of interest in gold as an asset class are as follows:

Diversify your portfolio

Buying gold is one of the easiest ways to diversify your investment portfolio. As most portfolios are usually made up of financial assets such as stocks and bonds, gold gives you the ability to spread risk.

By diversifying your portfolio you are then achieving additional protection from fluctuations in the value of any single asset, or indeed group of assets. The risk factors that may affect the price of gold are very different from factors that affect other assets and asset groups. Any investment portfolio, small or large, that contains gold is generally considered to be less volatile and a stronger proposition to those that do not contain gold.

Inflation hedge

As financial market cycles come and go, historically gold has retained it’s purchasing power over the long term. The value of gold has remained stable for centuries. As anybody who watches the financial markets can see, the purchasing power of many currencies has declined, due mainly to the continuous rising prices of goods and services worldwide. In direct response to this the clever investor will very often rely on gold to counter inflation and fluctuations in currency.

Currency hedge

For many of the same reasons one should diversify an investment portfolio, gold is very often used as a hedge against currency fluctuations (especially the US dollar). When there is a rise in the value of the dollar, gold price generally falls. On the flip-side a fall in the dollar (the world’s main trading currency) generally produces a rise in the price of gold. It is for this reason that gold consistently proves to be a most effective asset in protecting investors against dollar weakness.

Risk management

As gold is a lot less volatile than most commodities and many equity indices, this in-turn means it tends to behave more like a currency. This feature of gold offers investors low volatility, and may help to reduce overall risk in a portfolio, adding a beneficial effect on expected returns. Gold also manages risk more effectively as it can protect against “tail risks” – the infrequent or unlikely but consequential negative events on financial markets.

Demand and supply

Gold prices are inextricably linked to the shifting balance of supply and demand. The demand for gold has shown consistent and sustained growth over the past decade. Indeed since 2001 and alongside these facts, long lead-times and increasing production costs have not resulted in any noticeable increase in gold mining output. These supply and demand factors have paved the way for the most positive long term outlook for gold investors in over a quarter of a century.

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