Gold as a retirement investment
World Gold Council (or WGC) research has shown that even a modest gold share contributes to a portfolio’s performance. It protects against the downside. Let’s see if it really helps.
Portfolio diversification doesn’t really mean including only non-risky assets. It means assets that don’t move together. Gold has had a negative correlation to large-cap U.S. stocks since 1990. This means that when stocks go down, gold prices tend to go up. Gold’s average correlation to other U.S. equities and Treasury bills (or T-bills) has been virtually zero. This usually happens in the moderate real rate environment. This characteristic makes gold an effective portfolio diversification investment.
Gold has different levers than assets that impact stocks or bonds. As the market sentiment turns negative due to high inflation and low or negative real interest rates, investors flock to gold to preserve their money’s purchasing power. Historically, when markets are bad, gold is one asset that’s doing relatively well. For example, during inflation, gold is considered a hedge. Its value rises, while bond’s value declines.
Gold isn’t correlated with other assets. It has different supply and demand fundamentals compared to other assets.
Gold’s liquidity is higher than most liquid equities, United Kingdom gilts, and certain currency pairs. It lacks credit risk. This can help investors balance the risks in their fixed income and equity allocations.
Long-term time horizon
However, the above figures mask the important short-term fluctuations in correlations. This includes the long period when gold and stock prices move together. However, over the long term, gold can protect investments against systemic—or undiversifiable—market risk better than other investment alternatives.
Usually, gold stocks like Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), Newmont Mining Corporation (NEM), Agnico-Eagle Mines (or AEM), Yamana Gold (or AUY), and exchange-traded funds (or ETFs) investing in stocks like the Gold Miners Index (GDX) have a good correlation to gold prices. However, they’re impacted by many factors that are specific to each company. They’re usually more volatile than gold. Depending on the risk appetite and macroeconomic conditions, investors can go for gold (GLD) or gold stocks.
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