Gold is a physical commodity subject to the vagaries of supply and demand. The value of platinum often changes quickly, and gold’s price movements could be very large at times. In addition, it has a habit of carrying out badly when the stock market does well. For all these good reasons, you can jump to the conclusion that gold can be an unsafe investment. Which would be true if the thing you possessed was physical yellow metal or gold-focused shared money and exchange-traded funds (ETFs). If you use gold within a larger, varied investment plan, however, it isn’t only safe to own but can provide you with positive returns when the rest of your portfolio is battling.
Here’s why gold can be considered a safe investment, when used the proper way. Gold’s main use is for jewelry, which makes up approximately 50% of precious metal demand. Another 40% of demand comes from the physical investment in gold by individuals and central banking institutions, and includes gold coins, bullion, medals, yellow metal bars, and demand from ETFs and similar products that make investments directly in yellow metal with respect to others.
The remainder of demand is largely industrial in nature (dentistry, for example). Step from those figures back, and it’s clear that approximately 90% of gold demand is based on its intrinsic value. This is something of the historical issue, because the world fundamentally chose gold as a currency thousands of years back.
In fact, at one point, most paper money was supported by a country’s holdings of physical platinum. That right time has transferred, of course, with fiat currencies now supported by the guarantee of a national government to make good on its commitments. Image source: Getty Images. Although government authorities have decided it’s simpler to be off the precious metal standard than onto it, it doesn’t change the central issue that backs gold’s intrinsic value and safe-haven status: There’s only so much platinum in the world. The silver that’s above surface being used in some fashion is estimated to be around 190,000 metric loads. Today is notably less The amount of platinum in the bottom that may be economically mined, at 54 roughly,000 metric plenty.
This is a large issue: If someone desires another ounce of platinum, they need to dig it up. And aside from concealing platinum, there’s no realistic way to make it vanish. Meanwhile, no one will be making any longer of it (as Medieval alchemists demonstrated long ago), leaving technological advances and price increases as the only ways to increase the economically viable reserve of gold. Although it is the balance between demand and supply that results in a price for gold, the physical nature from it is exactly what provides its intrinsic value.
By comparison, if the U.S. So yellow metal is a physical asset that people wear as jewelry or own in the form of coins and pubs, with supply and demand generating the price. But to get an idea of what which means in accordance with other assets you will need to look at some statistics, like standard deviation.
Standard deviation is the amount to which the price of something differs from its average over a given period of time, with lower figures suggesting less price variability. To be reasonable, standard deviation and annualized return vary over time. Moreover, investments sometimes use of these statistical runs. However, gold’s standard deviation has been higher than that of the S&P 500 within the trailing 3-, 5-, and 10-year periods. Gold’s more impressive range of volatility is typical, not the exemption.
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The thing is, platinum and stocks don’t always do a similar thing at the same time. For example, when the currency markets does well, gold often behind lags. And since the market has an extended history of heading higher over time, owning gold as your only investment would clearly be a risky proposition.
But the interplay between stocks and platinum is where gold’s value lies for traders — and just why it can be a safe investment if you use it properly. An important way to look at the partnership between resources is by looking at correlations. Effectively, just how do two investments move around in relation to each other. For instance, the correlation between the entire stock market and the midcap portion over the past 10 years roughly is roughly 0.98. Which means they move in virtual lockstep, as you might logically expect. Gold, however, has a correlation with the currency markets of 0.04 over that same period.
Essentially, gold does its thing. When you pair assets that move from each other differently, you create a far more diversified portfolio. This is why mixing up bonds with stocks is the foundation of so many portfolios. Bonds have a poor correlation with stocks, meaning they have a tendency to decrease up when stocks are going, and vice versa.