The Wisdom of investing in gold

 Athe last 3 years gold has been performing exceptionally well compared to most asset classes. The gold price AUD has grown by 44%. Investors who have added gold as a diversifier in their portfolios are definitely seeing the wisdom of doing so with the current inflationary state of the economy. A lot of investors have taken their cues from legendary fund managers like Ray Dalio, the Chief Investment Officer of Bridgewater Associates, one of the largest hedge fund who came out strongly to support gold. 

He isn’t the only one. Stanley Druckenmiller diversified his own portfolio with  a 20% gold allocation and managed to build a personal wealth of about $4.5 billon. David Einhorn built his Greenlight Capital from a $900,000 business to one that was worth $11 billion. He has come out against monetary policies and governments’ vociferous stimulus plans. These aren’t the only three extremely rich and successful fund managers that have preached about gold and its long term prospects. There are others who see gold for what it truly is: the best form of money anybody can have. Gold has protected many from inflation because it is able to maintain is value and purchasing power in difficult economic time. Not only has it been a great hedge for investors but in the last 20 years it has consistently provided good returns than other asset classes. 

Still investing in gold has remained controversial. 

This is mostly because the debates around gold are driven by philosophies, not facts. It is hard to value gold and market commentators often find it hard to speculate what and why the gold price AUD moves the way it moves on a daily basis.

Most commodities like oil, iron etc have a lot more industrial uses than gold has. The demand for gold mainly comes from the jewellery industry or investment. So, basically investing in gold is simply investing in asset protection.

Unlike stocks and bonds, gold does not generate regular income so investors can only benefit from its capital growth. 

These reasons make gold seem frivolous but it would be naïve to ignore the power that gold has just because you can’t draw an income from it. 

In today’s economy that is largely artificial, gold is more likely to perform better compared to government bonds in case of a rise in inflation. In the event that a country’s economy goes through some major economic shock, gold has no credit risk. Historically, government bonds were safe for parking money, however some of the most credit worthy government trading on negative yielding bonds have managed to rack up over $18 trillion in debt and this debt is still growing. As this debt increases so will the attractiveness of gold increase. 

Wait, there more …

Gold is an excellent diversifier

The price of gold has an inverse correlation with other investment assets and shares. This means having gold can reduce the risk of an investment. The 1990 Nobel Prize winner for economics, Harry Markowitz showed how investors can have the best return by combining investment assets with negative correlations. He literally won the prestigious Nobel Prize by showing how investors need gold or assets like it.