Gold, to many investors is a symbol of safety, a tried and tested method of protecting your hard earned wealth against a multitude of uncertainties including financial crisis and political turmoil.
It’s true to say that despite the increasing strain between Russia and Ukraine as well as the growing tensions in the Middle East gold hasn’t exactly gone crazy. Furthermore neither has the price reacted to falling interest rates something the shiny metal had traditionally responded too.
Why is this you may ask? Well according to Chris Dillow (Investors Chronicle) this is mainly down to three counteracting factors.
- There hasn’t been a great deal of activity in shares or oil prices either – usually gold will rise if shares are seen to fall as investors scramble to deal with losses from stocks.
- Inflation hasn’t become the problem that some investors feared over, therefore demand for gold in fear of rising consumer prices just hasn’t happened.
- Lastly and perhaps most significantly the US dollar has risen, here at least gold has continued its historic pattern of falling when the US dollar strengthens.
Therefore as can be seen gold really is rather unpredictable and this Chris argues is the very reason we should all hold a little gold. Gold is the perfect asset to ensure you have your risks balanced. Gold does well when other assets don’t and when other assets rise, history tells us that you won’t lose a great deal from your gold holdings.
Those investors with just equities and gilts tend to have a higher chance of a 10% loss based on standard deviation compared to those who also hold gold as well as equities and gilts. This is because gold has “zero correlation with gilts and equities and so helps diversify risk”.
And this is where gold holds its own forming the perfect diversifier for any size portfolio – You have insurance for your home and your car why would you not have insurance for your wealth?