For centuries, gold has been seen as a safe haven and a store of value. Why should modern times be any different? Today, investing in gold is easier than ever, thanks to exchange traded funds (ETFs). If your clients are clamoring for some exposure in their portfolios, read up on the ins and outs of this unique asset class.
Gold has long been used as a hedge against political and economic uncertainties, and central banks around the world back their currency with gold reserves. Gold is the metal that is seen as a “safe haven” in times of world turmoil, prompting some investors to buy gold bars, which always will have some value. Gold is also used widely in industry, including computers and telecommunications.
Some will simply never be comfortable with owning gold they can’t see and for them, taking physical possession makes the most sense. But if you simply want exposure, consider the benefits of owning gold ETFs.
Gold’s Many Uses
What’s great about gold is that it tends to have a low correlation to other asset classes, which basically means that it is a great diversifier. Historically, gold is negatively correlated to stocks and other financial instruments. In utilizing the proper combination of gold with other assets, an investor may reduce the overall volatility and risk of his or her portfolio.
Gold is used for a variety of reasons because it’s seen as an uncorrelated asset. On days when the markets are trading lower, you will generally see gold ETFs and other safe-haven tools, such as the Japanese yen and U.S. Treasury bonds, trending higher. That hasn’t changed – gold is still a rainy day asset because it’s seen as a better store of value than equities and other commodities when times are tough.
This is especially evident when there is weakness in the U.S. dollar. In this situation, gold is an effective hedge because it holds its value even as the dollar is losing it. This, in turn, causes more investors to flock to the security of gold, which further pushes gold prices up.
Gold has been an effective hedge against inflation. Though the risk of inflation is low now, eventually the money that central banks have put into the financial system may pose the risk of significant future inflation. Aware of this, many investors are building up their gold stockpiles now.
Gold is also a store of value independent of the financial machinations of balance sheets and earnings projections. Furthermore, during periods in which prices contract, or deflationary periods, the relative purchasing power of gold can still remain high.
Lastly, gold is a hedge in times of geopolitical strife. Any large crisis or uncertainty in the world will usually send people to the safety of gold.
The Benefits of Gold ETFs