People have been holding gold for ages. Why, after centuries, do exchange traded fund (ETF) investors still find gold attractive today?
Gold is a valuable component of an investment portfolio, writes Tony Daltorio for Investopedia. It has been shown that gold has held its value over the long term. The precious metal has hedged against inflation and devaluations of major currencies. Daltorio provides these attributes that make gold a prudent investment:
- Value. Gold has held its value over the years and people still use gold as a way to preserve wealth for their progeny.
- U.S. dollar. As the dollar devalues, investors put their wealth into gold, which typically results in higher prices for gold. The weakening dollar can be attributed to large budgets, trade deficits and an increase in the money supply.
- Inflation. We have all heard of gold’s ability to hedge against inflation. In times of U.S. inflation, the average real return of gold was considerably higher than the stock markets.
- Deflation. There has been a slowing business activity, a drop in prices and excessive debt not seen since the Great Depression. It was also during this deflationary period that the relative purchasing power of gold climbed.
- Global Uncertainty. Gold, or the “crisis commodity,” has been bought up after a rise in world tensions. This doomsday outlook provides a rise in gold prices resulting from low confidence in a government.
- Supply. The selling of gold bullion from global central banks have slowed and production of new gold from mines have also been diminishing. A basic economic rule of supply and demand would show that reduced supply should result in increased prices.
- Demand. Emerging market countries have also been buying up gold. Such areas include India, one of the largest gold-consuming nation in the world, and in China. A growing interest in commodities as an investment class has also been driving up demand for investors.
- Portfolios. To diversify a portfolio, an investor would find investments that are not closely correlated to one another. Gold tends to have a negative correlation to stocks and other financial investment tools. A combination of gold with stocks and bonds may balance volatility and risk.
SPDR Gold Shares (GLD): up 0.1% year-to-date
PowerShares DB Gold (DGL): down 0.3% year-to-date
For full disclosure, some of Tom Lydon’s clients own shares of GLD.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.