Gold supporters contend it provides portfolio diversification due to its low correlation with stocks; however, this statement could be misconstrued.
Gold’s returns depend heavily on timing. It tends to perform better during market contraction periods, while it underperforms during expansionary cycles. Therefore, it’s vitally important that investors carefully consider all aspects of investing before selecting gold as an asset class.
1. It’s a store of value
Gold has long been seen as a store of value during times of economic uncertainty or upheaval, due to its scarcity and historical precedent as something with inherent worth.
However, gold has typically outshone stocks over longer time frames. Stocks offer greater growth potential with reinvested dividends; thus making them the optimal investment vehicle for those seeking long-term wealth accumulation.
Stocks offer more diversification against inflation than gold can. They’re better at withstanding cash flow issues and currency devaluations, and may provide higher returns if companies are expanding rapidly. Investors should thoroughly research a company before investing, taking note of its debt-to-cash-flow ratio and historical trend analysis to help determine whether its dividend payouts can remain steady during difficult times. Ultimately, a diversified portfolio comprising both gold and stocks provides the optimal way to protect themselves from inflation.
2. It’s a hedge against inflation
Gold can offer some protection from inflation, but investors looking for additional strategies should also consider other investment vehicles like Treasuries or stocks as ways to offset its threat. Inflation erodes purchasing power; stocks however tend to keep pace with inflation by offering compound growth when dividends are reinvested.
Stock returns tend to outshone gold returns over longer time frames. Anyone who has held onto gold for any length of time has likely learned two things from doing so: it lags stocks significantly (often significantly) and acts as an ineffective inflation hedge; though there have been exceptions where gold did well during high inflationary periods, its recent weakness against consumer price inflation shows this is no longer the best inflation hedge available.
3. It’s a store of wealth
Gold is a tangible asset with long-term value, providing stability when markets and economies experience uncertainty. Investors frequently turn to precious metals as an investment to protect their wealth against volatile stock markets and economies.
Gold investments offer a great way to bolster portfolio diversification. Due to its low correlation with stocks, it acts as an effective hedge against more volatile assets like the S&P 500 index. Unfortunately, when it comes to actual returns it becomes more complex.
Though gold tends to perform well during economic downturns, it has not proven as lucrative over the long-term compared to other asset classes. Furthermore, owning physical gold may incur costs such as storage and insurance; additionally it doesn’t generate income so may make this investment option less appealing than others for many investors. It is wise to consult an objective financial advisor prior to making your final decision as to whether gold should form part of your portfolio.
4. It’s a store of memories
Gold has proven itself an appealing investment option during a time of economic instability, which makes it a highly sought-after commodity. But for long-term investments, stocks offer more secure returns.
Since 2000, stocks have outshone both gold and US bonds in terms of returns after inflation. A dollar invested in gold returned -0.4% annually after inflation while investments such as S&P 500 and US small caps returned 7.7% per annum.
Gold’s return is unpredictable and unpredictable, while stocks provide an income stream with consistent dividend payments that don’t fluctuate so significantly. Therefore, unless you are an aggressive trader or tactical investor who needs gold for some other reason, there’s no reason to sell your stocks for gold; in fact, over the past 15 years the S&P 500 has outshone gold with higher rates of return and reduced correlation – to see proof for yourself please view this chart:
