Gold Offers Diversification that is Disappearing
Diversification is what prevents catastrophic loss. The problem is that many investors are not as diversified as they think they are. In recent decades, assets have begun to exhibit similar movements which means that one of the most important strategies an investor has is beginning to falter. In fact, between the periods of 1990 to 2000 and 2006 to 2016 cross-asset correlation increased by 33%. This trend puts investors in a difficult position because the market today offers fewer opportunities to diversify investment. Fortunately, gold gives investors a chance to renew their diversification because it is an asset that has had a low or negative correlation with equity indices for almost twenty years.
Gold Offers Improved Liquidity
While US citizens often choose to hold gold as an investment, many individuals in other countries use gold as a way to boost liquidity. For example, it is common for gold owners in India to rely on gold as a source of collateral when seeking a loan. This means that gold owners can often obtain capital faster when they pledge gold which is universally acknowledged as a global currency. For this reason, just over half of investors in India own some form of gold. Moreover, the average Indian household stores 11% of its wealth in gold. Loan issuers can process transactions faster when they have the kind of assurance that comes from gold. The relationship between gold and liquidity has grown since the onset of the pandemic which has left many people seeking access to capital.
Gold Helps Protect Against Tail Risk
Tail risk represents the fact that remote events happen less frequently, but when they do occur they generate an enormous effect on outcomes. The word “tail” is used because it refers to the left and right sides of a normal distribution curve – a bell curve – which resembles tails. This concept is relevant to those investing in precious metals because the COVID pandemic was an upheaval that had a massive impact on all aspects of life, especially finances. It is no surprise that silver and gold delivered returns of 47% and 24% respectively in 2020 when the pandemic began to impact everyday life. These events serve as a reminder to investors that the unthinkable can in fact happen and when it does it is best to be prepared with an asset class that will outperform when tail events occur.
Gold Can Create Stability When the Yield Curve Inverts
An inverted yield curve has preceded the last seven recessions. The current yield curve is inverted which has prompted many investors to reconsider their strategy. The yield curve inverts when investors become pessimistic about the economic setting of the near term. As a result, investors demand a greater return on short-term investments which are seen as riskier. Equity and bond investors are taking the most recent inversion as a warning that they need to broaden the range of assets held in their portfolios. Many of these same investors remember that the value of gold increased dramatically after the global financial crisis that started in 2008 when the Producer Price Index for gold rose 101%. Forward-thinking investors are applying lessons from the past to protect their future.
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