Gold is a unique asset class and possibly the first asset class to exist. Gold has been a store of wealth, a currency and a commodity for thousands of years. Furthermore, there is a growing body of research which supports the notion that gold is a unique asset class and one that is independent of other asset classes and macroeconomic indicators such as GDP and inflation.
Diversification protects your portfolio from fluctuations in the value of a single asset, or a group of assets that usually move in a similar direction.
For the typical investor’s portfolio, this combination of wealth and assets is typically comprised of stocks and bonds. Financial analysts agree, however, that diversification of investment portfolios is a smart move for almost every investor in protecting against detrimental market fluctuations that will inevitably occur.
Therefore, portfolios that include gold are generally less volatile than those that do not.
Independent studies have shown that gold offers enhanced opportunities for diversification, relative to most other alternative assets. While traditional diversifiers often fail during times of market instability, even a small allocation to gold can significantly improve the consistency of portfolio performance. Particularly appealing to many investors is the fact that this protection applies during both stable and unstable financial periods.
When you invest in gold, there’s no chance that a company will go out of business, as with an equity.
Unlike a currency, the economic policies of the issuing country cannot affect the value of gold, nor can inflation in that country undermine it.
Gold benefits from demand among a wide range of buyers - from the jewellery sector to financial institutions, to the technology sector and manufacturers of industrial products and medicines.
Liquidity risk: Worldwide markets trade gold 24 hours a day. The gold market is deep and liquid, as demonstrated by the fact that gold can trade at narrower spreads and more rapidly than most diversifiers or even mainstream investments.
Gold, like all financial assets, is subject to market risk. However, it tends to have low correlations to most assets usually held by institutional and individual investors.According to the WGC's research, gold can help to reduce the potential loss suffered when infrequent or unlikely but consequential negative events occur.
Specifically, even a small allocation to gold, ranging between 2.5% and 9.0%, can decrease the Value at Risk (VaR).
Adding to price stability, gold is mined all over the world. Unlike many other commodities, this geographical diversity reduces the chance of supply shocks from any specific country or region impacting heavily on gold’s price.