The most compelling reason to own gold is its role in portfolio diversification
The most compelling reason to own gold is its role in portfolio diversification. Gold's properties as an asset class make it an excellent tool for reducing overall portfolio risk and potentially enhancing long-term returns.
The key to diversification is finding investments that are not closely correlated with one another. Gold has historically had a negative correlation to stocks and other financial instruments.
Typically gold has had a low or negative correlation with other major asset classes, such as stocks and bonds. This means that when other assets are underperforming—though, again, 2023 to 2024 seems to counter this—gold may hold its value or even appreciate, helping to smooth out portfolio returns over time.
While bad news for those who make the case that gold inversely correlates with stocks and other assets, its lack of correlation with stocks, bonds, and so on—its prices seem to have their own logic (or lack thereof)—means it's excellent for diversification.
For example, during the stock market crash of 2008, gold prices rose, providing a cushion for diversified portfolios. Then, in the 2020s, as the market rose, gold bucked expectations and continued its rise. In times of geopolitical tension or economic uncertainty, gold often benefits from a flight to safety. The mid-2020s conflicts in Europe and the Middle East have contributed to gold's appeal in this regard. For investors heavily exposed to a single currency, gold provides a way to diversify currency risk. While gold and the U.S. dollar have recently strengthened in tandem, breaking their usual inverse relationship, it's still a hedge for many the world over with weaker local currencies.
While gold can be volatile in the short term, it has maintained its value over very long periods, making it a stable component in a long-term investment strategy. Get in touch for strategies to invest in gold over the short, medium and long term. Whichever best suits your circumstance.