Gold is on every investor’s mind these days – it closed the week above $1900, a tremendous milestone for the only form of money that survived for thousands of years. Investors owning gold as a long-term investment or only as a mean to diversify their portfolio feel vindicated.
Gold fulfills numerous roles in a portfolio, one of the most important ones being a hedge against inflation. While inflation is nowhere to be seen these days, things can get out of hand rapidly.
But inflation is viewed as a measure of the value of money. When money declines in value, the fiat currency buys less than it used to do before. Gold, therefore, added to a portfolio, protects it against an unexpected decline in the main currency.
Gold in the Times of the Coronavirus
Gold and bonds fulfilled their role in protecting investments during the Great Financial Crisis of 2008 and 2009, and also during the current COVID-19 pandemic. The rise in the price of gold (and silver) reflects investors’ uncertainty about the future, with no prospects of a solution to the health crisis.
From a technical perspective, gold is poised to make a new high. After consolidating for many years around the $1000 level, it broke higher in the summer of 2019.
What is interesting is that the breakout came way before the coronavirus crisis. Therefore, long-term investors, those that always own gold as a small portion of their investment accounts, benefited the most.
Owning gold can take several forms. One way is to simply buy XAUUSD using your trading account available at the brokerage house. Typically, investors allocate around 5% of their portfolio to gold.
Another way is to own “paper gold”. This term refers to owning shares of gold producers. Therefore, investors go on the stock market and buy and hold shares of gold producers around the world. Again, 5% is considered a normal allocation level.
Yet another way is to buy ETFs (Exchange Trading Funds) that track the gold producers. They offer a cheaper way to own a mix of gold producers while benefiting from the direct correlation with the price of gold.
Finally, investors can always own the physical stuff – gold bars or coins. Numerous dealers exist, in places such as Singapore, the Netherlands, the United Kingdom or Switzerland. Against a fee, the dealer stores the gold for you, and your investment avoids any other intermediary and fluctuations on the stock market.
Will the price of gold make a new high? It really does not matter anymore, as gold proved, once again, why it is the safest investment of them all.