By Jeffrey Nichols, Senior Economic Advisor to Rosland Capital
Many investors are buying gold because the metal's bullish fundamentals promise higher prices ahead. But there are other rock-solid reasons to own the yellow metal than expected appreciation and handsome capital gains in the next few years. Gold is attractive, not just for possible and expected upside capital gains, but also for minimizing the downside risks that threaten our other investments.
Gold provides wealth insurance, insurance that minimizes downside risk to one's overall personal savings and investment programs. It is the ultimate "umbrella policy," protecting savings and investments against a host of risks, some that we're aware of . . . and others that we can't even imagine.
To begin with, it provides insurance against economic, financial, and political shocks that could badly hurt investment portfolios, retirement plans, and other savings -- including, as we have seen in recent years, even the collapse in home prices and, with it, the home-owners equity that many were counting on for their retirement years.
In addition to gold's role as portfolio protection against economic, financial, and political shocks, it also serves two other important functions -- as a portfolio diversifier and as an inflation hedge.
Because its price tends to be uncorrelated or inversely correlated to the prices of conventional equities and bonds, declines in these other investment markets may be offset or mitigated by inclusion of physical gold in an investment portfolio. In short, when stocks and bonds lose value, gold tends to appreciate -- so owning some physical metal can help maintain the value of your overall portfolio.
Perhaps, gold is most valued around the world as "inflation insurance." Over the long term -- measured by years, decades, even centuries -- gold holds its value like nothing else. Over time, as inflation eats away at our currency's purchasing power and erodes hard-earned wealth, gold-price appreciation keeps pace and preserves savings.
I recommend prudent investors hold a "core" position of five to ten percent of their investable assets in physical gold -- and, for most, this means bullion coins (like the American Eagle, Canadian Maple Leaf, or South African Krugerrand), which are the most liquid and reliable form of gold ownership.