Saving money for delayed gratification is better than spending money for an instantaneous thrill, but nothing beats making smart investments with your savings to see a multiplier effect. Many people these days have smartened up and they are no longer keeping their money in savings accounts. Rather, they are heavily invested in the stock market with 401k plans. However, it is important to have multiple streams of income and it is much more important to diversify your investments.
Diversifying your investments literarily saves you from putting all of your eggs in the proverbial single basket. If you ask most people with a 401K plan if their investment is diversified, they’ll give you a convincing affirmative answer. If you ask them to tell you about the diversification of their investments, they’ll tell you that they have some money in mutual funds, they have bought some dividend-paying stocks, their momentum stocks, and their EFT holdings.
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The aforementioned scenario sounds diversified – it has mutual funds, income-paying stocks, price-gain stocks, and ETF baskets that spread exposure across different sectors. However, the major problem with the aforementioned diversification scenario is that the investor still has massive risk exposure to the equity markets. This piece seeks to explore why investors should start considering gold as a great way to diversify the holdings in their portfolios.
Don’t mind the gold bears, gold is a glittering gem
One would find it very hard to understand why many investors don’t have gold in their portfolios despite the fact that gold is a safe-haven asset that provides a measure of stability in troubled times. It is no longer news that we live in the most-troubled of the troubled times and dark shadows are gathering over the global economic landscape.
The global equities markets are suffering from the aftereffects of irresponsible fiscal policy on the part of central banks. Geopolitical tension is rising from the Middle East, across Europe, all the way to the Americas. Terrorists are becoming bolder and the Internet gives them a voice. Britain is threatening to leave the EU and the EU is not as strong as it used to be. There’s the issue of poverty in Africa, global warming, and climate change. Whichever way you look at the situation, we are nearing a global apocalypse with each passing day.
One of the reasons many investors have shied away from gold is the loud voice of gold bears in the last couple of years. Legendary investor, Warren Buffet is especially vocal about his bearish stand on gold. A popular battle cry among gold bears are the words of Warren Buffet saying, “(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
The chart above shows the rising gold prices in the year-to-date period in sharp contrast to the pessimistic outlook of the bears. Many of the bears have conveniently ignored the million tons of gold that central banks are hoarding as backbone to keep the economy alive and that gold tends to shine in periods of economic turbulence. Now, gold has stupefied the bears as it starts 2016 on an impressively bullish note.
Gold is the best performing asset in 2016
Gold bears can talk about how gold lost 10% in 2015, they can talk about how miners are losing money, and they can exaggerate how the demand for gold is falling in China and India. However, the hard facts from the market show that gold is the best performing asset class in 2016 and the yellow metal is on track to continue its bullish ascent going forward.
The chart below shows how gold has fared in relation to equities in the year-to-date period.
From the chart above, it is obvious that gold has gained more than 20% since the markets opened for trading this year. Investors in the gold-backed ETFs such as the Direxion Shares Exchange Traded Fund Trust (NYSEARCA: NUGT) and SPDR Gold Trust (ETF) (NYSEARCA: GLD) can also boast of similar gains. In contrast, the S&P 500 is down 2.06%, the Dow Jones Industrial Average is down 2.01%, NASDAQ Composite is down a massive 5.97%, and small caps are not faring better as Russell 2000 spots at 3.67% decline in the YTD period.
Analysts are convinced that the rally in gold will extend through the rest of 2016 because the fundamentals support the bullish outlook for gold. Juan Carlos, director of investment research at the World Gold Council notes “as we have seen stock markets around the world tumble dramatically, the need to protect capital has increased — and gold has benefited from that.”
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Axel Merk, founder of Merk Investments, with 20% of its portfolio allocated to gold notes that the market volatility is providing gold with tailwinds. In his words, “Gold is the winner of that game because it has the least industrial use so it’s least affected by the global slowdown.”
[Image Courtesy of Pixabay]