Managing gold in your portfolio

Managing gold in your portfolio


Gold has an extensive history of maintaining its value. Still, gold like all investments involve risk. Gold prices have historically seen strong fluctuations.


One reason for fluctuating prices is that the value of a bullion coin or a gold unit trust is directly affected by the current spot or market price of bullion. This price fluctuates daily and can be affected by a multitude of factors such as the perceived scarcity of gold, current demand, market sentiment and economic factors. Therefore, the price of your gold investment can go down as well as up in value.


Second, like all prices, the gold price reflects not only the inherent value of gold, but also the relative strengths of the currency in which it is quoted. For example, the dollar price of gold may increase more in percentage terms than the sterling price, to the extent that the change in price is a reflection of dollar weakness (in this case, against sterling) rather than an intrinsic change in gold market fundamentals. So if you purchase a gold investment in US dollars and the US dollar has increased by 20% by the time you sell it 12 months later, your investment would have fallen in value by 20% - regardless of any change in gold market fundamentals.


The strength of the US dollar during the two decades between 1980 and 2000 was an important reason why the gold price did not perform well during those years. It was in part the rapid rise in the dollar that hurt the dollar gold price. Another reason for gold's poor performance between 1980 and 2000 was the success of the world's central bankers in fighting inflation. Gold's role as a hedge againts inflation can be one of the main reasons that people buy it.



Despite the volatility of gold prices and its sensitivity to fundamental factors, the diversification benefits of gold in a portfolio are backed by strong evidence. Ibbotson Associates, a leading authority on asset allocation, performed a study with respect to the portfolio diversification benefits of gold, silver and platinum bullion covering a 33 year period from February 1971 to December 2004. Ibbotson determined that of the seven types of assets covered in the study, the precious metals asset class is the only one with a negative correlation to other asset classes. What this means is that precious metals perform best during the years that traditional asset classes such as stocks and bonds had negative returns. Ibbotson determined that investors can potentially improve their portfolio risk-reward performance by including precious metals with allocations of between 7.1% and 15.7% for conservative to aggressive portfolios respectively.



Historically, gold has produced excellent long-term gains during up cycles; however, it may not be suitable for everyone. You should acquire a good understanding of gold products before you invest. Since all investments including gold can decline in value, you should have adequate cash reserves and disposable income before considering a precious metal investment.



In the end, speculating in gold should be avoided at all cost by most conservative investors. Speculting involves short-term trading and the early withdrawal from accounts or securities can result in substantial penalties or fees - in addition to any decrease in gold prices due to fundamental factors.

Ref: Make Money Work For You by Keon Chee & Ben Fok