Gold is essential for your diversification strategy. Learn how to protect your portfolio.
With recent occurrences such as geopolitical tensions and climate change, the markets have become more unpredictable than ever before. This can be tricky for anyone trying to build a well-balanced trading portfolio to reduce risks for consistent gains.
Everyone knows of the adage, “Don’t put all your eggs in one basket”— Now, the big question is… which basket then?
The sudden rise of chaos in the market brightened the appeal for safe-haven assets. Many traders have included greenbacks, mutual funds, and government bonds… but there’s one reliable asset that has proven to stand against the test of time.
Low and behold, it’s gold.
Before we delve into why gold is a great portfolio diversifier, it’s important to first understand how to go about your diversification strategy.
Diversification involves putting your money in a variety of assets that typically do not react in the same way or at the same time to market volatility.
Because gold is not tied to any specific currency, this helps protect your portfolio against dollar devaluation and fluctuations in exchange rates.
During the financial crisis in 2007 – 2009, we witnessed one of the worst shocks to the US economy. The US stock markets crashed. The housing bubble had burst. Unemployment climbed. As we were on the brink of total market collapse, investors sought shelter in gold. The demand for gold spiked and continued to climb, doubled in value, reaching new highs*.
*PS. This is a cautionary lesson of why we need to diversify our portfolios.
Central Bank’s Sustained Purchase of Gold
According to a report from the World Gold Council (WGC) on January 31, 2022 was a huge year for gold. Central banks and other institutions snapped up around 1,082 tonnes of the precious metal, setting a new record. The trend continued into 2023 with the second-largest purchase ever recorded, totaling 1,037 tonnes.
When central banks buy lots of gold, it can become scarce. This often happens during times of political tension when people see gold as a safe bet. As more people rush to buy gold, its price goes up. Now could be a wise time for you to put your money on the precious yellow metal before it’s too late.
Remember the impacts of the 2022 Russia-Ukraine Conflict?
The Dow Jones Industrial plunged 1.76% while the S&P 500 lost 1.55%. Nasdaq 100 dropped 1.59% at the end of the day, entering bear market territory. U.S. stocks were under pressure, along with major Europe stock indexes. However, gold prices continued to surge and held most of its gains at the market close.
For the majority, this is a tragedy. While we don’t wish for the tensions to escalate, gold has once again proven its status as a safe haven. Industry experts believe that only a sharp reduction in geopolitical tensions or the unlikely event of an interest rate hike by the Fed will cause demand for gold to decrease.
If history is a guideline, this leads us to the next point as the Middle East conflict intensifies.
Gold’s rapid rise was driven further when Iran launched over 300 drones, missiles on Israel, in response to April 1’s suspected Israeli strike on the Iranian consulate in Damascus, Syria.
On 17 April 2024, gold prices surged above 2,400.
Want to stay in the know? Follow the latest XAUUSD gold price on the app.
The US dollar and gold typically have an inverse relationship: when the US dollar rises, gold prices tend to fall, and vice versa.
According to Jim Wyckoff, senior analyst at Kitco Metals (quoted by Reuters):
What’s really telling about the strength of gold is the US dollar index and Treasury yields are climbing, yet gold continues to rally strongly. That’s very indicative of strong safe haven demand.
Plus, there’s a fast and easy way to add precious metal to your portfolio: Gold CFDs
By trading gold CFDs, you can…
… all while gaining the same market exposure.
Make sure you trade with a broker you can trust. If you’re new to VT Markets, you can start trading precious metals with a 50% welcome bonus.
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