By Areena FxWhy should gold be a part of your investment strategy? According to a recent report by the World Gold Council titled “Gold as a Strategic Asset,” the answer lies in its unique attributes and role as a long-term investment.
Gold is deemed essential for a well-diversified portfolio due to its distinct characteristics. Unlike many assets, gold is highly liquid, meaning it can be easily bought or sold without facing credit risk. Furthermore, its scarcity and historical value preservation make it a reliable store of wealth over time. Gold also enjoys diverse demand, serving purposes ranging from investment and reserve assets to jewellery and technology components.
Here are three critical ways in which gold can enhance your investment portfolio, as outlined by the World Gold Council:
- Diversification: Gold typically exhibits an inverse correlation with equities and other risky assets. During market turmoil, when traditional diversifiers may falter, gold retains its value or even increases. For instance, amid the 2008 financial crisis, while equities and other diversifying assets plummeted, gold surged by 21 per cent in dollar terms. Conversely, in favourable market conditions, gold may positively correlate with equities, adding to its diversification benefits.
- Returns: Historically, gold has delivered consistent long-term returns regardless of economic conditions. Over the past five decades, gold has provided an average annual return of 8 per cent, outperforming many other asset classes, such as equities and bonds. Its resilience and potential for solid returns in various market environments make it an attractive addition to investment portfolios.
- Liquidity: The gold market is vast and highly liquid, with an estimated value of $5.1 trillion in physical gold holdings by central banks and investors. Its liquidity surpasses major financial markets, allowing investors to buy or sell gold as needed quickly. Even during economic stress, gold remains liquid, ensuring investors can access their holdings when required.
In summary, gold’s unique attributes make it a valuable complement to stocks and bonds in diversified portfolios. Its ability to provide diversification, consistent returns, and high liquidity makes it desirable for investors seeking to mitigate risk and preserve wealth over the long term.