Gold Price

4 Reasons To Buy Gold

4 Reasons To Buy Gold

Written by Gold Price     May 18, 2015    

Smart investors know that buying gold and silver makes sense. These and other precious metals can help diversify an investor's holdings, offsets risks in other assets, generate income and more.

Gold "can be used in portfolios to protect global purchasing power, reduce portfolio volatility and minimize losses during periods of market shock," according to an analysis by the World Gold Council (WGC).

 

 1. Diversification

Gold and other precious metals offer investors a way to hedge against the risk of losses in their investments. The thinking is that if stocks, bonds or real estate slump, gold, silver and the like could offset any losses with gains.

Gold prices can rise or fall due to factors that don't affect equities, debt instruments or real estate in the same way. That suggests that gold and other metals can diversify a portfolio and smooth out the investment landscape's ups and downs. 

As an October 2013 WGC report states, "Investors of all levels of experience are attracted to gold as a solid, tangible and long-term store of value that historically has moved independently of other assets." 

2. Inflation

Precious metals such as gold and silver offer investors a way to offset the effects of inflation or weak local currencies.

"Investors also make use of gold’s lack of correlation with other assets to diversify their portfolios and hedge against currency risk," the WGC explains.

Gold and other metals can rise in value enough to overcome the loss of purchasing power that inflation creates. As inflation erodes investments' value, gold can keep its luster.

The Federal Trade Commission, a U.S. government agency that protects consumers, says "people sometimes use gold to diversify their investment portfolio: it can help hedge against inflation and economic uncertainty."

3. Capital gains

Gold can also be profitable to buy and sell.

Demand has been on the rise in part because gold is highly valued for jewelry and other romantic gifts in emerging-wealth countries such as China and India.

The world's gold supply could increase to meet that demand, but gold mining is a costly activity. If mining companies decide the effort isn't financial feasible, the new supply of gold could fall further short of the new demand for it.

The WGC report says "modest allocations" of 2-10 percent in gold can "protect and enhance the performance of an investment portfolio" and a 5-6 percent allocation "is optimal for investors with a well-balanced 60/40 portfolio."

Other financial advisors say investors should keep 20-30 percent or more of their portfolio in gold and other precious metals.

4. Safety

Gold and other precious metals can look like a safe harbor in times of economic and political turbulence. If the U.S. dollar crashes or a financial crisis hits the U.S., Europe or the entire world, gold might turn out to the best metal to own.

Gold is easy to buy, own and trade whether investors purchase gold stocks or mutual funds or actual gold coins or bars.

Day-to-day prices of precious metals can be volatile, so buyers should be prepared to stay the course. A dip in the market price could be a buying opportunity.