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.
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.
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.
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.
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.
We can also see that gold plays a major role in several “pre-built” investment portfolio strategies designed by financial experts.
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.
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.
Another unique property of gold is that it is a tangible asset that you can hold in your hand.
This provides several potential benefits:
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.