Diversification: A common reason for investors to buy gold is the long-held belief that gold diversifies financial portfolios. For the past 45 years, gold’s 12-month correlation to the S&P 500 is basically non-existent. Gold is a simple way to diversify an investment portfolio and the lack of correlation with what happens to the S&P 500 means that investors will continue to buy gold for the foreseeable future.
The World Gold Council reports, “During most market crises over the last 25 years, gold has consistently increased portfolio gains or reduced its losses.” Professional investor and television host Jim Cramer recommends gold because it tends to go up when everything else goes down and advocates for not having an investment portfolio without gold.
Global Debt Levels: Debt is not only an issue for the United States, which has seen its national debt swell to $20 trillion over the past eight years, but as more central banks around the world attempt to jumpstart their economy by spending, debt levels have gone up dramatically. More money in print and more debt make investors nervous and nervous investors turn to gold.
Much has been made about the national debt of the United States but when taking into account debt to GDP, the U.S. government is not the worst country by far. Japan has over twice the amount of debt to GDP of the United States. Italy also has a higher ratio of debt to GDP than the U.S. Seven of the top 10 government-debt-to-GDP countries have actually increased their ratio over the past year. With no relief in sight for global debt levels, expect investors to continue turning to gold over the next decade to escape global economic uncertainty.
Demand: China and India are the largest consumers of gold in the world and seem to have an insatiable appetite for the precious metal. China alone consumed nearly 1,000 metric tons while India finished just short of 850 metric tons. India has the largest “consumer” demand for gold with much of China’s consumption attributed to banks. The Indian wedding season in October is historically the time of year that realizes the highest global demand for gold. Gold is weaved into the culture of both these countries, so demand for gold worldwide is not likely to decrease.
Hedge Against Inflation: Gold is positively correlated with the cost of living. As the cost of living rises so does the price of gold which makes the yellow metal a hedge against inflation. U.S. Treasuries are usually a financial instrument investors use to hedge against inflation. Recently, the 10-year Treasury yields were at an all-time low following the Brexit vote and have remained depressed, making gold the most attractive hedge against inflation.
Negative Interest Rates: Bond yields are extremely low in an economic environment where negative interest rates are a reality in some countries and a possibility in others. Negative interest rates have led to some undesirable side effects. As real estate becomes more popular, the possibility interest rates rise again and consumers are unable to repay the loans or the real estate decreases in value are distinct possibilities.
In Sweden, the household debt to disposable income has risen to 175%, up from a low of 90% 20 years ago. The increase in household debt is due to the negative interest rates, making consumers feel compelled to use the money because it is inexpensive. Many believe the current ratio of 175% to be unsustainable. Even if spending increases low or negative interest rates are a concern because they increase lending and possibly risk taking. In mid-2016 it was reported that over $11 trillion of global debt was in negative yield territory.
Gold Bears are now Bulls:Carl Icahn, Stanley Druckenmiller, and George Soros are three of a growing number of famous investors turning to gold citing a looming, significant stock market crash in the near future. If the U.S. economy is indeed in the beginning of a recession and the stock market crashes, many investors will turn to gold. The precious metal is like any other commodity with its price based on supply and demand. If demand goes up, then the price of gold will increase.
Stocks are Limited: The S&P 500’s cyclically adjusted price-to-earnings ratio (CAPE) is now sitting above 26. Just prior to Black Tuesday in 1929, during the dot-com bubble in 2000, and prior to the financial crisis in 2008 are the only times in history that it has been this high. Difficult to imagine the long-term outlook for stocks being positive given the historical significance of the CAPE. During the week that ended October 19th investors had taken $17 billion from stock market mutual funds. The exodus could continue even post presidential election.
U.S. Dollar Already Peaked: The U.S. dollar has gained in strength and is at its highest point since 2003. Only twice since 1980 has the dollar been stronger, meaning there is little upside for the U.S. dollar. Historically, the price of gold and the strength of the U.S. dollar has been negatively correlated. If the dollar weakens or in an extreme case collapses, the price of gold will go up.
Between 1998 and 2008, the U.S. dollar declined in value against other currencies. During that same time period the price of gold nearly tripled.
Gold as Wealth Preservation: Gold has been used as a storage of wealth since the beginning of civilization. Paper currencies have not fared nearly as well. Gold has perceived value in times of uncertainty. Gold conducts electricity and does not tarnish, making it useful in a variety of industries. The yellow metal is used in most electronic devices, including cell phones. Gold also has medicinal purposes including reducing swelling, bone damage, and to relieve joint pain and stiffness. Global economic uncertainty may be a constant over the next 10 years, making the stability that gold provides a desirable investment.
Many people are weary of Wall Street thanks in large part to the mortgage crisis in 2008. Another major economic crisis seems imminent within the next decade, making gold attractive to these skeptical investors.
Top 4 Things to Consider When Investing in Gold
There are many options when investing in precious metals and a lot to know before you invest. Here are some of our tips on how to get started with your precious metals investment.
Know and embrace the volatility of precious metals
Though more people are turning to gold and other precious metals, these investments are still as risky as the stock market. The spot price, or current market price, of precious metals changes continuously through any given day. Don't let this freak you out. Precious metals have been traded for thousands of years and it is the only form of currency that has not given way to time or changing political climates. Your investment will be not let you down, so don't let one negative day scare you.
Figure out what kind of investor you are
Everyone has different reasons for why they are investing and, along with that, different goals for their investments. It's important to evaluate those reasons before you can make the best decisions for your financial future. This can be a hard step to take, so we've created a 3-Minute Portfolio Builder in order to aid you.
Find a precious metals company that you trust
This is the best advice we could give you. You do not have to make these decisions alone. There are people out there who specialize in providing knowledgeable advice on how to start your precious metals investment and how to position it to garner the most success. The best part of having a precious metals expert or specialist in your corner is that they work for you, so they care about your investment portfolio just as much as, if not more than, you do.
Do what you know is right for you
At the end of the day, this is your investment. You need to make the right decisions to achieve your investment goals. Trust yourself, trust your precious metals adviser, and be prepared to see your portfolio flourish.
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