Gold: A Portfolio Staple

 | Nov 13, 2012 | 4:00 PM EST  | Comments
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As an active trader, I am constantly talking about support, resistance, moving averages and Fibonacci levels, but I often take a step back for perspective. The trend has been up for the last decade, and gold should continue to move higher for the foreseeable future. Investors should have some level of exposure to precious metals in their portfolios.

Five reasons why a gold allocation in the past, present and future makes sense:

Portfolio Diversification: I've always been a proponent of owning multiple asset classes in a portfolio to reduce risk or correlation between divergent asset classes, including but not limited to securities, Treasuries, real estate and alternatives. The lower the correlation, the better. In recent years, gold has glittered while other asset classes have suffered.

Scarcity: There isn't an infinite supply of gold. Even with growing worldwide demand, production remains consistent. Only 1% to 2% of new gold production is added to the stockpile annually. In this environment, the market is not immune to significant supply shocks.

Inflation Hedge: The money-printing process being implemented by the Federal Reserve and other central banks leads us down a path to inflation. The difficult part is anticipating the timing. By definition, growth in the money supply is inflation in its purest form, and currently that is an acceptable practice. Gold has been and should continue to be a hedge against real or perceived inflation.

Store of Value: Inflation erodes the value of dollar-denominated assets, which translates into investors losing by saving and having assets in a depreciating currency. Gold allows appreciation when the underlying currency is depreciating without the fear of losing money. In the last 10 years, the U.S. dollar has lost approximately 30% of its buying power.

Maintain Purchasing Power: Gold allows the consumer to buy the same quantity of goods over time. For example, over the past 50 years gold has bought roughly the same amount of oil with some variations at market extremes.

Gold Futures
Source: QST

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