Since the closing of the gold window in 1971, the annual return of gold has been around 7.6%, which provides investors with a solid ROI when compared to other fixed income investments. In that same time period, the Dow Jones and S&P 500 both have averaged 7.4% annual gains. It’s the long-term returns of gold and its physicality that make it an attractive investment option during turbulent political and economic times. For example, during the period from October 7, 2007 to March 9, 2009, the S&P 500 plummeted 56.8% while gold increased in value by 25.5%. This similar trend has occurred during most of the economic downturns that have taken place in the past 100 years. Many investors are now moving into gold due to the uncertainties in the global political arena and fears about the stability of the extended stock market bull run.
Here are several of the reasons investors often turn to gold:
Gold Lowers Volatility
Since gold does not usually move in tune with stocks, it provides diversification and some protection against market downturns. Stock prices and gold prices have almost no correlation, so investors often see gold gaining in price during periods of lowered stock prices. This diversification also lowers the volatility of a portfolio, making it attractive for investors who want to enjoy the potential gains of stocks as well as the safety and steady growth of gold.
Gold for Retirement
One way to leverage both tax advantages and gold’s propensity to ignore market trends is to invest in a gold IRA. These function the same as traditional IRAs that contain mutual funds or stocks, but the investor is buying actual gold. Gold IRAs are a sound way for investors to diversify their retirement holdings with an investment vehicle that is largely independent from stock market price swings. With such an IRA, the investor works with a custodian who handles the actual management of buying and securely holding the gold.
Gold remains an under-owned asset class, which makes it attractive to many contrarian investors who appreciate gold’s intrinsic value and are wary of the strength (or lack thereof) of the US dollar and other fiat currencies.
Inflation has been less of a concern in recent years, but during periods of the 1970s and 1980s it hit double digits. Gold still functions as a hedge against inflation because its price tends to outpace the price rises that occur during inflationary period. Gold investors aren’t necessarily expecting a period of hyperinflation in the immediate future, but they understand that markets ebb and flow, and that uncertainty in the broader economy can spur monetary policy actions that will result in future higher levels of inflation.
When considering gold-based investments such as a precious metals IRA, it’s important to not place your entire portfolio into just one type of investment vehicle. Gold is meant to play a part in a well-structured portfolio where you manage risk but still see appreciation. It’s an investment that is primarily focused on wealth preservation and steady returns.