“Historically, gold has always been a safe haven against inflation and a safe haven in times of political instability.”
This quote from John Paulson tells us two valuable things:
1. When the going gets tough, gold helps you overcome the slump...
2. But only if you diversified your portfolio to include gold in it.
This brings us to the matter at hand, how safe is gold as an investment?
There’s no definitive answer to this. Like most financial instruments, gold comes with associated risks and rewards. But it does have several characteristics that make it a portable store of wealth in times of fear, when the market conditions are bleak, and when other assets are performing poorly.
This basically means gold prices tend to increase during a recession, in times of war and crises. Just think about how the price reached an all-time high in the midst of the 2020 pandemic. There are also instances when gold performs well when the stock market takes a dive.
Did you know that the price of gold between 1970 and 2020 has increased by more than 5300%? The inflation rate within the same timeline has risen by 688% according to the Bureau of Labor Statistics. Given these figures, it's easy to see that gold easily outpaced inflation.
Gold and the US dollar share an inverse relationship. When confidence in the US dollar is high, most investors move into it and sell gold. The opposite is also true because gold is often considered the dollar's true counterweight. This makes the precious metal a primary alternative currency to invest in in such situations.
In the stock market, prices are often influenced by a company's performance and financial health. If a business performs poorly, investors are exposed to counterparty risks -- lower to zero returns on investment, default risk, the inability of the other party to fulfil their obligations to stockholders, etc.
This doesn't hold true for physical gold, however. It's one of the assets, along with silver, that is free from counterparty risks.
Take note that we're talking about physical gold here. This means gold ETFs (exchange-traded funds) are not as safe from risks. In fact, there have been numerous cases where ETF funds collapsed or are mismanaged.
The same risks affect stocks of gold mining companies.
Overall, gold is safest in its physical form, but you can ensure the safety of other gold investments with the right strategies.
Given gold's characteristics, adding it into your portfolio can mitigate the risks of other assets and the volatility of the precious metal itself.
But how much gold should you have in your portfolio? Buying physical gold comes with additional costs for storage, insurance and such. If you invest in gold-related stocks and ETFs, you're also vulnerable to counterparty risks.
The recommended allocation for gold is 1% to 5% per portfolio, but in a report in CNBC, the CEO of Singapore Bullion Market Association, Albert Cheng, said an increase from 5% to 15% is ideal, especially since current gold prices are high.
Cameron Alexander, director of market data company Refinitiv, also said that "even an increase of 1 to 2% can have a massive bearing" on an individual's portfolio.
Check out 6 of the Best Strategies Every Beginner Should Know When Trading Gold
Regardless of the financial instrument you invest or trade, working with a reputable broker can significantly help protect your account. So what makes a great gold broker?
Most importantly, they have a reputation for providing traders and investors with the best trading experience, increasing their profit potentials in the process.
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These awards confirm our commitment to providing you with a safe platform to trade gold and make more accurate trading decisions.
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