If you looked out your window and saw a hurricane coming, would you cancel your house insurance? Of course not; that would be foolish. We are content to pay for house insurance for most of our lives, yet very few of us have actually experienced a fire or a major disaster where we had to use the insurance.We are comfortable with paying the premiums every year in order to avoid a catastrophic loss.
Owning gold is tantamount to owning an insurance policy on your investment portfolio. Depending on how you hold it, you may not have to pay premiums and unlike cash, in the long term it increases in purchasing power. The capital appreciation is many times greater than the minimal storage costs.It is like an insurance policy that allows you to put the premiums in your own pocket. Most insurance policies are expenses, and unlike precious metals, are dependent on the insurance company staying in business. How much of your money has been spent in premiums for your car and house insurance over your lifetime? And what is there to show for it if you've never made a claim? Gold is like a portfolio insurance policy with no premiums to pay.
The reason gold acts like insurance in a portfolio is that, historically, it is the least correlated asset to traditional financial assets like stocks and bonds.This means that it tends to move in the opposite direction to stocks and bonds. While gold has an excellent record as portfolio insurance, it is not 100% guaranteed to protect against short-term equity downturns. It is, however, ideal as long-term (three years or more) protection.
How to Avoid Trading away Your Wealth
Gold is complex and has many attributes. It is a coveted precious metal, because it is scarce, and difficult and expensive to mine. Chemically, it is stable, portable and easily divisible. The fact that it is scarce, collectable and easy to split into various denominations means that it makes sense to consider it as money, rather than a commodity. It has been used as money for 5,000 years, with the first gold coins being struck around 550 BC. Some see gold as an industrial commodity, and trade it, and others know that it is money and is meant to be held, not traded. Central banks understand this, and South East Asia certainly sees the value of holding gold. According to the World Gold Council, “while global consumer demand for gold has increased nearly 50% over the last decade or so, demand for gold in South East Asia has increased by over 250% during the same period.” China is driving most of that growth in demand.
