Should You Still Diversify Your Portfolio with Gold?


Gold prices have experienced a roller coaster ride in the past few years. Investors who had bought gold prior to 2010 can still benefit today by selling certain portion of their golden assets to earn respectable returns. Gold, as an investment tool, is especially popular for portfolio diversification ability. So much so, that a large number of financial experts recommend diversifying the portfolio by holding 10 – 15% of investment in gold.

However, the past year saw gold took its worst hit since 1981. Many investors are being cautious of investing in gold because of that. The 2008 financial debacle is still looming in the minds of most investors who do not want to take on any more risks with their precious investment. Here we will discuss whether investors should still add gold to their investment for portfolio diversification despite decreasing value of gold.

Why now is the Best Time to Buy Gold?

The first thing investors should realize is that gold is not a short-term investment. It provides stable returns over the long-term duration. The long-term gold returns easily outpace inflation and interest rate providing excellent hedge against them. Moreover, gold returns are not affected by the condition of the economy. When markets are bad people turn to gold to earn positive returns on their investment.

Management consultants recommend that the best time to diversify and explore new business avenues is when it is earning profits and not when it is incurring losses. Similar is the case with gold investment. The best time to buy gold is not when gold prices are rising, buys when the gold prices are decreasing, and reached their lowest possible position.

When using gold as a portfolio diversification tool, the first thing you should realize is that gold primarily is wealth insurance. You buy life insurance to protect you or your loved ones against unforeseen natural calamities. Similarly, the real value of gold lies in protecting and insuring your investment against unforeseen economic and financial condition.

Gold should not be seen as a short-term investment vehicle. It provides great benefits during long-term horizon in the form of protecting the investment from inflation risks, interest rate risks, and financial uncertainties. Moreover, the gold returns are negatively correlated to stock and bond returns. Therefore, investors should include as much as 15% of their investment in gold. And the ideal time to do that is when the gold prices have plummeted to their lowest possible level.

That is why this year is the best time for you to invest in and maintain proper levels of gold in your portfolio. With the Indian Government easing restrictions on import of Gold coupled with the fact that global gold supply is dwindling, Gold is projected to soar to new heights in the coming decades.

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