The global stock markets are not performing well after the spread of COVID-19. 2020 has been challenging for all businessmen, and it seems it’s going to be a long time before the stock markets fully heal from this drastic impact. As of 2021, more and more investors are becoming interested in gold, which continues to create, and cross milestones when it comes to prices. If you’re not sure whether or not to invest in gold yourself, here are a couple of why you should.
Gold is an Inflation Hedge
Gold is well known to be a hedge against inflation. This happens mainly because the value of gold tends to increase when the costs of living increases as well. Because gold has a negative correlation to stocks, its value increased in every instance the stock market prices plummeted in the past 50 years, which also happened around high-inflation years. The reason for that is when fiat currencies lose purchasing power during inflation, gold will still be priced in the fiat currency units. Hence, its price tends to increase along with prices of other commodities. In addition to this, some investors say that gold holds a good value throughout time, so if your local currency is losing its value, it’s recommended that you invest in gold.
Balance Your Portfolio
Every seasoned investor is aware of the fact that diversification reduces risk to a great extent. With stocks paying dividends and bonds and savings paying interests, your original investment will steadily grow. Gold isn’t a risky asset. In fact, its performance between 2006 and 2016 surpassed several government bond savings accounts and inflation itself. When various property values and equities fell, gold maintained its high value. As mentioned earlier, gold has a negative correlation to stocks, so even if the prices of gold fluctuate throughout a certain period, your portfolio will certainly be diversified if you add it to your stock and bond assets.
Counter Stock Market Crashes
As you can see, the stock market is one of the most popular types of investments out there. The market tends to go through crash or correction phases the most, which affects billions of dollars’ worth of investment, resulting in devastating financial impacts on everyone holding stocks. For this reason, gold investors at CMI Gold & Silver advise beginners to add gold assets to their portfolio early on and counter future corrections or crashes in the stock market. As mentioned earlier, diversifying your assets is the best means of reducing risk, so make sure that you invest in at least three types of assets along with gold.
Protection against Counterparty Risk
The counterparty risk is the possibility that one person who’s involved in a transaction might default on the obligations dictated in a contract. If your assets do carry that risk, it might reflect on your creditworthiness. One good method you can use to avoid such risk is investing in gold. Simply put, gold won’t be stored in any banking system. In fact, if you store physical gold in your house or in a vault facility, there won’t be any counterparty risk associated with the precious metal. It’s true that there won’t be 100% insurance on your gold, but it cannot be manipulated or reduced by any means. Gold is a tangible asset and, therefore, carries zero counterparty risk.
Immunity against Deflation
Deflation is the period in which prices decrease staggeringly, affecting businesses and the economy in general. This usually happens when business activities become stagnant and debts increase in value. Although global deflation didn’t affect the economy since the Great Depression in the 1930s, it can still very much happen. It should be noted that during the Depression that gold purchasing power skyrocketed when other asset prices plummeted. In any case, gold’s purchasing power will remain relatively unchanged should deflation occur, so it still provides immunity all the same.
Gold Demand Is High
Emerging market economies have increased the demand for gold in the past few years. Gold constitutes a large part of the cultures of different countries. India, for example, is known to be the country that uses gold the most in several industries, like making jewelry. Similarly, China also has increased demand for gold, especially that gold bars are traditionally known to be a means of protection. In addition to this, demand for gold increased among investors, now that they know the true value of gold. Since the gold demand can soar high, particularly during specific periods like India’s wedding season, gold can certainly make a worthy investment.
Gold Supply Is Low
The supply for gold markets can sometimes wear thin when demand increases abruptly. For example, the vaults of central banks constituted most sales for gold, but the number of sales decreased, mainly due to the reduced production of gold from mines, which have already been decreasing since 2000. Because it can take 5-10 years to get a new mine into the production process, the gold supply, in general, is low. When it is at its lowest, the gold prices increase exponentially.
You Can Turn Its Volatility to Your Advantage
Ever since gold became a common asset for many investors, a number of studies have been conducted to explore the volatility and benefits of gold. The overall results indicate that investors certainly can turn gold volatility into their advantage, provided that they use it as a short-term investment and make use of it only when prices increase. By default, investing in gold won’t work well for long-term investors due to the ups and downs in gold value over the span of 10 years. In short, gold can be a means of protection for many, but only for a limited time.
Gold has its merits despite its long-term risks and volatility; it can help you diversify your portfolio along with stocks and bonds, and even though it might seem like an unappealing option when it comes to long-term investments, it’ll still serve as a hedge against inflation in the long run, so it’s a win-win situation. If you’re still worried about gold volatility, you can simply start with only a little gold in your portfolio, then increase that amount later if you wish to.