Why you should look to gold as an investment

Sharon L. Thornton, The Daily Record Newswire

Gold is a metal whose price is determined by several factors: Inflation, fluctuations in the dollar and stocks, currency-related crises, interest rate volatility, international tensions, and by increases or decreases in the prices of other commodities. The price of gold reacts to supply and demand, which are influenced among other things by consumer spending like all assets and overall levels of prosperity. Gold is technically not termed an investment, but is termed a storehouse of value.

Why should an investor own gold in their portfolio and consider it an investment? Here are six reasons why.

As a hedge against inflation.

Gold is well-known as a hedge against inflation. As inflation goes up, the price of gold tags along. The five years in which U.S. inflation was at the highest levels after World War II were 1946, 1974, 1975, 1979 and 1980. The average return in those five years for U.S. stocks, measured by the Dow was -12.33 percent whereas the real return on gold was 130.4 percent. Today’s economic conditions are setting the stage for the perfect inflationary storm.

As a hedge against a declining dollar.

The U.S. dollar as the world’s reserve currency is the primary medium for international transactions. The dollar is used for valuing the worth of commodities and is the currency held primarily by the worlds’ central banks. Gold is bought and sold in U.S. dollars, so weakening of the value of the dollar causes the price of gold to rise.

As a safe haven in times of geopolitical and financial market instability.

Gold is often referred to as the “crisis commodity” because it has a tendency to outperform other investments in times of world conflict. As we have moved to a global economy, banking or economic failures anywhere have the ability to destabilize the world economy.  When a banking crisis occurs, the public tends to distrust paper currency and turns to gold. Governments that rescue the economy with the printing press devalue their currency and cause gold to increase in value. Generally gold will rise in pace when confidence in governments is at the low.

As a commodity, based on supply and demand fundamentals.

Gold production has declined. Demand has increased. India is the largest gold-consuming nation in the world. China has one of the fastest-growing economies in modern history. Both countries are liberalizing laws relating to the import and sale of gold, which can facilitate gold purchases on a major scale. Previously individuals were only allowed to buy gold-backed certificates from banks.

As a store of value.

Gold will always retain a fundamental value and has proven to be an effective preserver of wealth.

As a portfolio diversifier.

Diversification of investments can improve overall portfolio performance. One key element in diversification is finding investments that are not closely correlated to one another. Most stocks are relatively closely correlated with each other. The same can be said for bonds. Gold has a historically low correlation to stocks and bonds.  Gold serves as a hedge against erosion of the purchasing power of money. Gold will increase in value in response to many events that decrease the value of stocks and bonds.

—————

Sharon L. Thornton is senior director of investments for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.