The Investment Case for Gold

The case for investing in gold is a strong one. And it is best summarized by the World Gold Council:

The market opportunity for gold in the investment sector is significant. Over the last five years (2004 – 2009), total identifiable investment demand has grown over 380% and is the fastest growing category of global gold demand. However, gold represents less than 1% of total global investment assets, meaning that the market opportunity for growth in gold investment is still significant.

Over the long run, gold competes on the basis of its diversification qualities and ability to mitigate macro risks rather than on the basis of its returns. Portfolios that contain even a small allocation of gold are proven to be generally more robust and better able to cope with market uncertainties than those that do not, showing improved stability and predictability of returns.

Gold diversifies the risk investors run when investing in other return-generating assets such as equities. It is a hard asset that carries no default risk. One of its primary roles is that of an insurance policy, providing protection during times of widespread weakness in other asset prices. However, there is no doubt that gold has an important role to play regardless of cyclical factors or economic conditions.

Gold’s role as a hedge against inflation is well known, and there is no doubt that concerns about inflation have played some part in gold’s popularity. Gold’s value endures across time and geography, and protects investors against the internal (inflation) and external (exchange rate) depreciation of their currency. A recent study by the World Gold Council shows that gold has a role to play both as a tactical inflation hedge and as a long-term strategic asset. If the world economy experiences a resurgence in inflation, then gold, like the other traditional inflation hedges, is likely to outperform mainstream financial assets.