4 hidden benefits of having gold in your portfolio
Recent economic conditions, such as high (but cooling) inflation, elevated interest rates, and the risk of a recession have caused some investors to reexamine their portfolios. While you might want to continue growing your money, the current economic environment might also be prompting you to consider whether you're comfortable with the level of risk in your portfolio.
With that in mind, some investors are turning to assets like gold to help balance out the risks of other investments. While there are no guarantees as to how gold will perform as an investment, it's traditionally seen as a relatively stable store of value and a hedge against inflation.
But those aren't the only possible gold investing benefits. There are some benefits of having gold in your portfolio that may not be as obvious. Here's what you should know.
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Hidden benefits of having gold in your portfolio
Some of the hidden benefits of investing in gold include:
Gold is a central bank reserve asset
Many central banks around the world, as well as government agencies, use gold as a reserve asset. For example, the U.S. Treasury stores gold at the Federal Reserve Bank of New York, along with other facilities such as Fort Knox.
Even though the U.S. no longer backs dollars in gold, the fact that it's still used as a reserve asset in many places around the world gives gold a baseline of support and credibility. Other commodities and currencies might not have the same international status.
Gold "is like the sign language of the financial world. It has value worldwide and isn't tied to any single currency, making it a useful asset during currency fluctuations or geopolitical instability," says Taylor Kovar, CFP, CEO at The Money Couple and Kovar Wealth Management.
Gold can protect against geopolitical risks
Geopolitical risks, like wars or trade disruptions, can affect a wide range of assets, such as oil and paper currencies. But gold can potentially protect your portfolio from these types of issues.
"Gold is not just a hedge against inflation but it also serves as a hedge against geopolitical tail risks," says Bob Elliott, CEO and CIO of Unlimited Funds.
If the dollar falls because of international conflicts, for instance, then gold prices could potentially rise as foreign investors look for another store of value.
Gold can strengthen a defensive portfolio strategy
While some assets might slide due to some geopolitical risks or other difficult economic conditions, it's possible that gold can protect portfolios amidst turbulence.
"Most investors look to assets other than stocks for diversification protection from downside periods. Most investors don't realize that over the last 75 years during periods of equity declines, gold has served as a better protection than bonds about half the time," says Elliott.
However, you don't necessarily want to try to time the market by shifting to gold right before a possible downturn. Market timing is notoriously difficult, if not just a matter of luck.
Short-term investing "is likely best left to sophisticated investors or those that can leverage advice from a financial planner," says Oerta Trepca, basic materials sector analyst at Nasdaq IR Intelligence.
But on a long-term basis, diversifying with gold might help your portfolio get through difficult periods.
Trepca points to a World Gold Council study that shows how a multi-decade strategy of "diversifying defensive investments to include both traditional defensive equity exposure, like consumer staples and energy, and gold could lead to improved returns."
"In the study, this allocation was also shown to protect the investor from market volatility and limit the portfolio's overall capital decline," she adds.
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Gold is tangible
Some investors prefer gold because it's a physical asset, particularly if you invest in gold bullion.
"It's tangible and portable. Unlike stocks and bonds, gold is a physical asset that you can hold in your hand," says Kovar.
And, unlike some other real assets like housing or timber, gold can be "easy to move around with you," he adds.
That said, the weight of gold can add up, so the more you invest in gold bars or gold coins, the harder it can be to physically store and move. But even if you buy assets like exchange-traded funds (ETFs) that exist in a digital format, you might like the idea that these are still backed by physical gold.
The bottom line
There are many potential gold investing benefits, and as you get more experienced at investing in this precious metal, your reasons for investing in gold might change. There are many ways to approach gold investing, and the choice depends on factors like your risk tolerance and return goals.
Beginner investors in gold might initially be drawn to the physical nature of gold, for example, such as if they trust that more than digital assets. And over time, you might develop a strategy for diversifying your portfolio with a range of assets, such as stocks, bonds, real estate, and gold.