Daily Gains Letter

Should Investors Still Diversify with Gold?

By for Daily Gains Letter |

Should Investors Still Diversify with GoldWhen it comes to investing, it’s important to diversify and spread your money around. Put all your assets in one basket and it could evaporate overnight if the markets go into correction mode. As a result, diversification is a good strategy to follow, because it can protect you from losing your entire retirement portfolio should the markets turn.

Having a number of different stocks does not make a portfolio diversified. A diversified portfolio means having different kinds of investments, including stocks, bonds, cash, and so on. While we all know diversification is key, it’s important to know where you should park your assets.

When the markets are bad, people turn to inflation hedges like gold. When the markets are doing well, they park a good portion of their portfolio in the stock market. Right now, a lot of people are turning to the stock market. And why not? The current bull market is now in its fifth year, the Standard & Poor 500 is up more than 18% since December 31, 2012, and the Dow Jones Industrial Average is up almost 20% since the end of 2012.

Many economists think this is just the beginning and that investors should keep their money parked in stocks. Others are not so sure, pointing to a raft of terrible economic news, including stubbornly high unemployment, falling median incomes, an increasing number of Americans receiving food stamps, high personal and student loan debt, and stagnant wages.

Wall Street is even getting a little nervous. Almost 80% of S&P 500 companies have issued a negative outlook. The S&P 500 may be reporting strong returns, but it’s not on the back of strong economic data. The current bull market has more to do with the Federal Reserve’s $85.0-billion-per-month quantitative easing policies and artificially low interest rates than anything else.

What will happen to Wall Street when the Federal Reserve pulls back, or even halts its quantitative easing program? The economic disconnect will come into sharp focus and the “Wizard of Wall Street” will be exposed from behind the curtain.

With a correction being imminent, what diversification strategies should investors consider? When I see a glaring economic disconnect between the bulls on Wall Street and terrible underlying economics, my eyes wander to gold.

But is gold a good investment? And should the average investor add gold to their investment portfolio?

Gold naysayers maintain that gold doesn’t really outpace inflation or grow to provide dividends or earnings, and that it is only worth what another party is willing to pay for it. Proponents of gold think you should hold a position in your portfolio as a hedge against Wall Street’s unfounded optimism in an economic rebound, the Federal Reserve’s quantitative easing policies, inflation, and the erroneous belief in a self-sustained global economic recovery.

While the spot price of gold is down 18% since the beginning of the year and almost 30% since the record-highs posted in September 2011, it’s hard to keep physical gold in stock. This is mostly because investors know that, thanks to the central bank’s printing presses, inflation is inevitable.

India, the world’s largest purchaser of physical gold, bought 162 tonnes in May at twice the normal volume. India’s average monthly imports in 2013 are nearing 104 tonnes, outpacing even 2011’s record levels. During the first quarter, central banks bolstered their holdings, purchasing more than 100 tonnes for the seventh consecutive quarter.

When push comes to shove, investors know that gold can be a worthwhile hedge against inflation or uncertain economic events—both of which we will see. Investors have three options when it comes to investing in gold: they can hold the hard assets, buy gold mining stocks, or consider a gold-backed exchange-traded fund (ETF).

The recent slide in the spot price of gold will be short-lived. The U.S. takes on $2.8 billion in new debt every single day, and it will never be repaid. And that’s why investors should add a gold position to their investment portfolio.

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