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Gold's
Usefulness as safe haven:
The geo-political and world economic structure
is currently undergoing major change-some have
even called the situation an "upheaval." This
means that the investment outlook, particularly
for certain parts of the world, is more unpredictable
than usual. Under these circumstances, it is logical
to conclude that certain investment portfolios
should include real (non-paper) assets such as
commodities for protection against a potential
decline in the paper markets.
Gold's
Usefulness as an Asset Diversifier:
Most portfolios are invested primarily in traditional
financial assets such as stocks, bonds and mutual
funds. Adding gold to a portfolio introduces an
entirely different asset; a tangible or real asset,
thus increasing the portfolio's degree of diversification.
The purpose of diversification is to protect the
total portfolio against fluctuations in the value
of any one asset or type of asset. Gold does exactly
that.
The
reason is basic:
The economic forces which determine the price
of gold are different from, and in many cases
opposed to, the forces which determine the prices
of most financial assets. The price of an equity
depends on the earnings and growth potential of
the company it represents. Likewise, the price
of a bond depends on its safety, its yield, and
the yields of competing fixed income investments.
The
price of gold, on the other hand, depends on
different factors:
Worldwide physical supply and demand for gold,
movements in foreign exchange rates, inflation,
interest rates and political turmoil. The effects
of all these factors are somewhat complex and
variable. But the important point to remember
is simply that they cause the price of gold to
move independently of the prices of financial
assets.
Article source: Compliments of the
World Gold Council
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