Gold As A Strategic Asset
Some buy gold as a luxury good, in the form of jewellery, and some use it for investment, or both. It is a highly liquid asset that is also very scarce and unlike many other commodities it is not used. It is no one’s liability. Being an element there is as much gold today as there was thousands, or even millions of years ago. The World Gold Council outlines four fundamental roles that holding gold plays in a portfolio which are discussed in depth here under:
As a source of long-term returns
Gold is valuable. It has been used in history as a form of money and today is used as a store of wealth. The price of gold has increased by an average of 10% year on year since 1971 when it began to be freely traded. Gold’s long-term results are comparable to stocks and actually higher than bonds or commodities. Gold’s value increases and price surges in times of market stress as opposed to other key asset classes, as witnessed during the 2008 financial crisis. We saw a 150% gain in the value of gold while on the other hand stocks crashed. As such, even a small allocation in gold would have offset the unfavourable returns elsewhere. It would also have provided security and a peace of mind when the banks crashed, provided gold was not stored in that specific bank and instead at a designated private physical storage company on segregated and allocated basis (such as Liemeta ME Ltd). For in depth information on the forms of gold storage please read our article: Physical Gold Storage.
Wealth preservation often only matters at certain times and that is usually during times of turmoil, war, currency debasement and financial troubles. Since these are too difficult to accurately predict it is always a good idea to have a small allocation of your portfolio in gold (as a rule of thumb: 7-15% approximately). Thus enhancing overall asset performance.
“Gold has not just preserved capital but has helped capital grow.” It has consistently outpaced inflation:
During the past 8 years Central Banks have been net-buyers of gold. During the first quarter of 2019, central banks bought a total of 145,5 tonnes of gold which is 68% percent more than a year earlier and a 7% increase in global gold demand for that period.
As a portfolio diversification tool to mitigate losses during times of market stress
It is not the standalone performance of gold that works, it is its stature as an example of “diversification that works”, as the WGC says. During times of rising correlations between other asset classes, gold remains reserved for most of the time. Extreme times then send people away and towards gold. During the 2008-09 crisis, for example, “hedge funds, broad commodities and real estate, long deemed portfolio diversifiers, sold off alongside stocks and other risk assets.” That was not, though, true of gold.
Gold investors benefit from both the fact that the gold market is deep and liquid. By the WGC’s estimates, “physical gold holdings by investors and central banks are worth approximately US$2.9 trillion, with an additional US$400 billion” as open interest via the gold derivatives markets. There is definitely some depth there.
The source of gold demand for its value as diversification looks like this:
As to the liquidity of the gold market we get transactions between US$ 150 billion to US$ 220 billion per day. This is the combined figure of both spot and derivatives OTC markets.
The average trading volume in gold exceeds the trading volume of all stocks in the S&P 500, for example.
It is a liquid asset with no credit risk that has outperformed fiat currencies
Gold is rare and gold is finite. Fiat money on the contrary can be printed in unlimited quantities to support monetary policies.
Gold goes beyond commodities
Although gold shares some similarities with commodities there are some distinctive differences when analyzing the supply and demand side such as:
Gold supply is balanced and mining is spread out evenly around the world such that political instability in a particular region will not create excessive supply shocks. Unlike typical commodities gold is not consumed thus its above ground stocks can be continuously utilized. Its demand for both as a luxury good and as an investment safe vehicle speaks for itself and results for more effective downside portfolio protection. Due to its nature and purpose being used and bought all around the world, its correlation to other assets is reduced.
In conclusion “from an empirical perspective, including a distinct allocation to gold has improved the performance of portfolios with passive commodity exposures” ~ World Gold Council.
Reference: World Gold Council
Why LIEMETA ME Ltd?
LIEMETA ME Ltd, Nicosia, Cyprus, provides physical storage of precious metals at its prime location in Liechtenstein as well as trade services of precious metals, mainly gold, silver, platinum and palladium.
Your precious metals are safely and securely stored “segregated and allocated” and we are one of the few physical storage houses for precious metals that provide full-cover insurance, including embezzlement.
Stored assets are fully legally owned by the client, client assets are of course not on our companies’ balance sheets.
LIEMETA is a privately owned, independent and non-bank company, meaning that its services do not fall within the scope of CRS or AEOI.
LIEMETA provides 100% discretion, 24/7 access to clients’ stored assets at its sophisticated unit and high-security building.
LIEMETA is proud to be chosen by high net-worth individuals as their trustworthy custodian, in Liechtenstein.
You are welcome to contact us through the below contact form.
We do not offer investment advice:
This information is provided solely for general information and educational purposes. It is not, and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell.
