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Gold and Market Volatility

Gold and market volatility

Gold has long been considered a “safe haven asset”. Investors often flock to gold when other asset classes become volatile. But why is gold seen as a safe asset? And how can investors make use of gold’s unique properties in their own portfolios?

Disclaimer: This is for informational purposes only and should not be considered financial advice. 


Stock Market Volatility

Volatility refers to periods of time where prices of assets change rapidly. Usually, this means a rapid decrease in asset prices, otherwise known as a market crash. 

But volatility can also refer to rapid, frequent movements in both directions. Early 2022 has been characterized by frequent volatility in markets, as investors assess the impact of rising inflation, interest rate changes, and ongoing supply chain disruptions.  


Safe Haven Assets

When the stock market gets volatile, investors often turn to so-called “safe haven” assets. 

Gold is a primary example of a safe-haven asset. It has thousands of years of history, and is often seen as a hedge against “black swan” unexpected events. 

We saw this play out in early 2020, as the Covid-19 pandemic spread throughout the world. As investors scrambled to protect their assets in an increasingly uncertain financial landscape, gold proved to be a popular safe haven asset.

The 5-year gold price chart, below, shows the trend perfectly. 

Gold 5 year chart

Image source: Kitco

In the first 6 months of the pandemic, gold spot prices surged over 28%, from around $1,600 per oz to over $2,050 per oz. In the summer, when cases were lower and the worst of the pandemic seemed behind us, gold prices pulled back to around $1,800 per oz, where they have stabilized since.


Can Gold Protect Your Portfolio?

Adding gold exposure to your investment portfolio may help to smooth out the bumpy ride of investing. 

One of the key principles of investing is to spread out your bets. By owning a variety of assets, you may be more protected from the volatility of any given asset class.

Of course, no one can predict what will happen in the future. But if we look to the past, we can see several examples of why owning some gold might improve returns and reduce volatility. 


Gold in popular investment portfolios

We can also see that gold plays a major role in several “pre-built” investment portfolio strategies designed by financial experts.

  • Ray Dalio’s “All Seasons Portfolio” features a 7.5% allocation to gold. Ray Dalio is the head of the world’s largest hedge fund, Bridgewater Associates.
  • Harry Browne’s “Permanent Portfolio” features a 25% allocation to gold. Harry Browne is a financial advisor and author.
  • The “Pinwheel Portfolio” features a 10% allocation to gold.

Financial experts often recommend a small to moderate allocation to gold for several reasons: It’s seen as a hedge against inflation, it often does well during market crashes, and it’s not highly correlated to other asset prices.


Gold as a tool for rebalancing

Portfolio rebalancing is an investment strategy that involves buying and selling asset classes in order to keep your current holdings in line with your desired allocations.

For example, let’s say you have a portfolio with 50% US stocks, 20% international stocks, 20% bonds, and 10% gold.

After a year, changes in asset prices have made your current allocation 52% US stocks, 18% international stocks, 19% bonds, and 11% gold.

In this case, you could sell a small amount of US stocks and gold, which have appreciated in price, and buy more bonds and international stocks.

This is an automatic way to “buy low, sell high”, and it keeps your original investment plans in line with your current situation.

Gold can be useful for rebalancing because it’s not highly correlated to other asset classes. When US stocks crash, international stocks typically do as well. Gold is more independent, and often moves separately from other assets.


Gold as a Physical Asset

Another unique property of gold is that it is a tangible asset that you can hold in your hand. 

This provides several potential benefits:

  • In an extreme event, having a physical asset outside of the banking system can be beneficial. 
  • Physical gold takes a bit of effort to sell. It’s difficult to “panic sell” gold when the market is crashing. On the other hand, stocks can be sold with a single click — and investors often make poor decisions in the heat of the moment. 
  • Gold is more tangible, and can help ease investor’s nerves when other assets are losing value. 


Wrapping up

No investor can predict the future. But looking at the past, we can see that gold has served a valuable role in investor’s portfolios for hundreds of years.

If volatility or rising inflation has you concerned about your portfolio, looking into alternative assets like gold, real estate and cryptocurrency may be worthwhile.

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