If you are considering purchasing precious metals to build or add to an investment portfolio, there are a number of benefits to investing into a long-term precious metals portfolio over short-term speculating and trading.
Investors use a method that is called ‘strategic asset allocation’ to build, develop and manage a diverse portfolio. This method essentially means that investors ensure that their investments are spread across a diverse and balanced set of asset classes. This prevents too much exposure or risk to a single asset class. One example of this would be to own some gold and some shares in the S&P. Normally, these two have an inverse correlation. That means when the gold price goes up, the S&P goes down, and vice versa.
Most investors do not maintain diversified portfolios. The base items that most individuals maintain in their portfolios include stocks, bonds and cash. However, a more diversified and well-balanced portfolio will also include precious metals, real estate investments, and other collectible items.
One significant problem with a standard, undiversified portfolio is the correlation between stocks bonds and cash. For example, stocks and bonds show a very high correlation, meaning that both go up and down on very similar patterns. A properly managed portfolio also includes assets that have a negative correlation to stocks and bonds, which are most commonly real estate and precious metals. Maintaining a diversified portfolio is so important, because it minimizes your exposure and risk to high volatility.
Of all asset classes, precious metals have the lowest correlation to the stock market, cash and bonds. This means that for every investor who holds investments in any of these asset classes, it is critical to consider maintaining a portion of your portfolio in precious metals as well.
It should also be noted that precious metals tend to perform very well, particularly in the long-term. One very significant reason for this is that precious metals regularly outperform inflation. In the 1800’s, a gold sovereign could buy you a nice suit or a very expensive dinner. That is still true today. In 1816, 1 gold sovereign was worth 20 shillings. At this time, 1 pound was worth 66 shillings. Today, one sovereign is worth around £250. In the long term, you would have been much better financially if you maintained your savings in gold sovereigns than in pound coins.
As a general rule it is recommended that 7% - 15% of a portfolio is maintained in precious metals in order to maximize your diversification and minimize your risk to excessive volatility.
Hedging is defined as “buying an investment designed to reduce the risk of losses from another investment.” In essence, buying gold helps to offset the risk of losing money in the event that the stock market goes down.
Government events regularly cause financial crises. For example, when the United States went off of the gold reserve in 1971, gold prices flew up as inflation increased rapidly.
In 1920 Germany, the gold price increased to a record 23 trillion Marks/oz up from 75 Marks/ oz, as hyperinflation set in and the Deutche Mark collapsed.
Since that time, hyperinflation or extreme inflation has also occurred in Indonesia, Mexico, India, Russia and Argentina.
Holding a portion of your savings in gold is a good way to hedge against hyperinflation or currency collapse in the future. With the United States debt levels at staggering, all time highs, and the Euro backed by a bankrupt banking system, the possibility of a currency collapse exists.
Sometimes random events can occur that can cause turmoil in the markets or in the current political or economic situation in a country, which can massively affect the value of currency. This can include everything from natural disasters to financial crises. Normally, if there is a random act of god such as this, the value of gold will go up. This is because the gold price almost always goes up during times of uncertainty. In essence, gold can act as an ‘insurance policy’.
In conclusion, it is a good idea for any investor to put a portion of their savings into precious metals, including gold, silver, platinum and palladium, as a way to hedge against uncertainty in the future, and to hedge against bear stock and bond markets. SwissBullion.ch recommend that clients place 7%-15% of their savings into precious metals.