PRECIOUS METAL SERIES
Between 2002 and 2011, the price of gold rose steadily, indeed spectacularly.
The market enticed a large number of speculators hoping to ride this golden
wave to prosperity. Those who bought early in the cycle and sold out at the
peak in July/August 2011 were certainly richly rewarded.
Today, the direction of the gold price is much less certain. Understandably,
people with a speculative mindset question the value of owning gold. Many who
bought during the 'bull run' have pulled out altogether, chasing returns from
equities, property and other 'risk' assets.
Even so, there remain compelling
reasons to own and hold some gold.
One of the most important arguments that people adhere to concerns the old
adage: "never put all your eggs in one basket". As anyone with a
rudimentary understanding of investment is aware, diversification plays an
important role in reducing risk.
Even in a portfolio that already has a wide range of investments, gold can be
a useful diversifier because it is relatively independent of economic cycles
and has low correlations to other financial assets. In other words, it often
performs well when others are going south!
Because of this, many regard gold as a vital insurance policy in an uncertain
financial and economic world. By reducing volatility over the long term, gold
can preserve wealth in the face of threats such as a currency crisis, credit
crunch, inflationary spike, natural disaster, geopolitical emergency or war.
For these people it makes sense to own and hold gold as their base assets
before considering other more speculative investments. The question is, how
much gold is enough?
