How Safe are Gold Investments?

Ever since the stock markets began their roller coaster performance, many people have dabbled in the wisdom of buying physical gold as a safer investment.

In volatile markets, gold is often considered a solid investment that will hold and increase its value as stocks go down in price. However, judging by the price of gold during the last year, some have wavered on the value of gold as a good investment.

Based on its price during this year, gold began at around $850 an ounce and spiked to $1011 in March as oil prices went up and predicted to reach $200 a barrel. However, ever since March, gold prices have retreated and bounced around from below $800 to $986, ending up in November at $747 per ounce.

These prices represent a 19% gain in the price of gold from January till the March peak and subsequently a 28% drop from March to November, with an overall 14% drop from the beginning of the year.

The point that many will assume from this is that if someone is trying to avoid the ups and downs of the stock market, gold investment isn’t a sound approach. The bounces are not as steep as they have been on Wall Street but they are not bounce-free either.

Of course it is still possible to make money with gold since, just like with stocks, it’s a matter of timing. However, the key point is that it is human nature to move to gold when it is the hot topic in the news but by then the prices have already climbed up substantially.

The following chart shows the long-term growth of gold prices from the year 2000 onwards. Based on this chart it is obvious that gold is indeed a good long-term investment.

Relatedly, since gold prices aren’t significantly correlated with stock prices, there is a case to be made for investing part of your assets(5-10%) in gold as a method of portfolio diversification.

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