is a foundation asset within any long term savings or investment
portfolio. For centuries, particularly during times of financial
stress and the resulting 'flight to quality', investors have sought
to protect their capital in assets that offer safer stores of value.
A potent wealth preserver, golds stability remains as compelling
as ever for todays investor.
As one of the few financial assets that do not rely on an issuer's
promise to pay, gold offers refuge from widespread default risk.
It offers investors insurance against extreme movements in the value
of other asset classes.
A number of compelling reasons underpin the widespread renewal of
interest in gold as an asset class:
Most investment portfolios primarily hold traditional financial
assets such as stocks and bonds. Diversifying your portfolio can
offer added protection against fluctuations in the value of any
single asset or group of assets. Risk factors that may affect the
gold price are quite different in nature from those that affect
other assets. Statistically, portfolios containing gold are generally
more robust and less volatile than those that do not.
Market cycles come and go, but over the long term, gold retains
its purchasing power. Golds value, in terms of the real goods
and services that it can buy, has remained remarkably stable for
centuries. In contrast, the purchasing power of many currencies
has generally declined, due for the most part to the rising price
of goods and services. Hence investors often rely on gold to counter
the effects of inflation and currency fluctuations.
Gold is employed as a hedge against fluctuations in currencies,
particularly the US dollar. If the worlds main trading currency
appreciates, the dollar gold price generally falls. On the other
hand, a fall in the dollar relative to the other main currencies
produces a rise in the gold price. For this reason, gold has consistently
proved to be one of the most effective assets in protecting against
Gold is significantly less volatile than most commodities and many
equity indices. It tends to behave more like a currency. Assets
with low volatility will help to reduce overall risk in your portfolio,
adding a beneficial effect on expected returns. Gold also helps
to manage risk more effectively by protecting against infrequent
or unlikely but consequential negative events, often referred to
as tail risks.
Demand and supply
The price of gold tracks the shifting balance of supply and demand.
Long lead times in gold mining mean production of gold is relatively
inelastic, regardless of increases in demand. Thats why the
rally in the gold price since 2001 has not engendered a meaningful
increase in gold production levels.
Demand for gold has shown sustained growth recently, due at least
in part to rising income levels in key markets. These supply and
demand factors have laid foundations for golds most positive
outlook in over a quarter of a century.
World Gold Council