Give Gold a Chance: Considering an Age-Old Portfolio Diversifier

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How does one convince investors to look at an asset whose price has gone nowhere for three years? It’s not easy, especially as gold’s glitter has all but faded in an era of fast-money fantasies and self-directed speculation.

Yet, I invite you to weigh gold’s true value as a diversifying force and a time-tested preserver of wealth. If it was good enough for pharaohs and kings – and remains a standby holding of central banks around the world – then just maybe, gold can earn a place in your long-term portfolio.

The Gift That’s Rarely Accepted

Unlike silver, which is cheaper and consequently tends to make fast and furious price moves, gold is more of a “steady Eddie” type of asset. Certainly, it’s possible to get some leverage to the gold price‘s fluctuations through futures and options contracts, or by owning gold-mining stocks such as Barrick (NYSE:GOLD) or Newmont (NYSE:NEM).

In contrast, the go-nowhere price trajectory of gold during the past three years has caused the yellow metal to be relegated to the back pages of financial publications, when it’s mentioned at all. This has been particularly frustrating to income-focused investors as gold, like other raw commodities, pays no dividend.

This isn’t to say that the gold price hasn’t moved at all. Indeed, it has moved, but not in the way that “gold bugs” would prefer; gold’s most recent series of lower highs and lower lows has led it from $2,000 in May to $1,850 at the beginning of September.

Contrarians should view the price dip as a gift, but few actually will. Shiny as it is, gold has garnered scant attention lately – but then, that’s typical. Counterintuitive as it may be, the line to buy gold at $2,000 is long but you can be the first in line to buy it at $1,850.

The Best Reasons to Own Gold Now

Rather than a producer of income (like a dividend stock) or a fast mover (like silver), gold is typically viewed as a hedge against crisis situations and the deterioration of fiat currencies such as the U.S. dollar. When established institutions fail, gold will remain tangible and, hopefully, reliable as a wealth-preservation vessel.

There is certainly some truth to this viewpoint. Unlike government and corporate bonds, which involve a measure of counterparty risk (though the government is unlikely to renege on its promise to pay back a bond’s maturity value with interest), gold doesn’t require a compact with any established entity to have value. As long as people are willing to pay for shiny objects, gold will be worth something.

There’s also a sense that in an Armageddon scenario, physical gold would be the best financial asset to own. Granted, if the power grid were to go down for an extended period of time, I’d probably rather have gold bars than stocks or futures contracts. Whether such a disturbing scenario is actually likely to occur is the topic of an entirely different discussion, however.

To me at least, gold’s greatest purposes are to maintain their value when the dollar’s purchasing power diminishes. Sure, the greenback might be strong at any given moment, relative to other fiat currencies; yet, over the long term, the force of inflation will inevitably destroy its value for buyers of goods and services.

Gold, meanwhile, should theoretically increase in value compared to the dollar over the long term. Just bear in mind that there will likely be some value slippage since it typically costs money to properly store and insure physical gold.

Be Ready for Just About Anything with Gold

Then, there’s the crisis-hedge angle. I’m certainly not suggesting that gold necessarily maintains its value, relative to the U.S. dollar, during a crisis situation; the COVID-19 pandemic showed that when worse comes to worst, precious-metal prices can collapse along with stocks. However, the gold price staged a sharp post-pandemic recovery, just like stocks did.

Instead of viewing gold as a crisis shield, it’s probably better to consider it a non-correlated asset for diversified portfolios. Gold doesn’t always move in the same direction as large-cap stocks, and this attribute should appeal to investors seeking to avoid concentration risk.

Finally, and perhaps most importantly, gold has history on its side. No matter what company you might invest in – even if it’s Cola-Cola (NYSE:KO) or MacDonald’s (NYSE:MCD) – I can guarantee that it’s not as old as gold. It’s a commodity and (sometimes) a form of money that has truly withstood the test of time. Therefore, as long as you know what gold’s true purpose is and how it can provide some peace of mind, feel free to add a few ounces and keep them for generations to come.

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