When it comes to making a decision about how to allocate your retirement assets, investing in gold is a very interesting topic, not just because of the dynamics of gold as an asset, but the psychological dynamics of the average investor go here.
Let’s address the elephant in the room: gold investing is nothing like buying stocks and mutual funds. This is something that is absolutely vital for any serious investor to understand, and to keep in mind that gold is an entirely different animal within the financial industry. An animal that is very much misunderstood. Not convinced? Well, without even getting into an economics discussion, simply ask yourself how do you feel about gold investing? When you think about stocks or bonds, do you get as captivated as you do when you think about gold bullion or gold coins? Probably not… Right? Here’s why:
A stock certificate is a piece of paper that might give you a return on your investment if
1) the company’s board of directors chooses a good management team, and
2) if that management team is able to continuously develop a competitive business strategy, and
3) if that team can actually execute that strategy, and
4) if negative economic factors don’t hinder its potential success. That’s a lot of “Ifs” as well as “Ands” to bet your financial security on.
Compare that with investing in gold. With gold bullion or coins, you’re purchasing a tangible asset, something you can hold in your hands, and something that is recognized as being valuable in every corner of the world. Furthermore, when you think about gold bullion or coins, your mind becomes captivated by feelings of security and stability. This is perfectly natural, because as humans, we tend to gravitate toward things that help us feel safer and more secure. When it comes to investing in gold, these feelings of security and stability are universal emotions that have been experienced by countless people through centuries… People who saw the value in owning a tangible asset versus owning pieces of paper (stocks, bonds, currency) that only have promises attached to them, but no physical value.
But how is investing in gold supposed to increase security?
Obviously, there are never any guarantees with any type of investment, but when it comes to investing in gold, it’s important to understand how it’s supposed to help protect your assets. One of the biggest reasons is that gold prices often move in the opposite direction of other investments (i.e. it doesn’t have a perfect correlation to them). What this means is that investing in gold can help you prop up the value of your nest egg when stocks and mutual funds are dropping in value, because gold prices would tend to go up during that time, as investors pull their money out of the markets and route them into gold investments.
Let’s take a recent example, the credit crunch of 2008. The chart below shows a period of about 18 months and compares the movement of the S&P 500 index versus gold prices.
You will notice that on many occasions, the SP 500 index (red line) and gold prices (yellow line) moved in completely opposite directions. When stocks were decreasing in value, gold prices were rising, and vice versa. This is a very important consideration for anyone investing in gold. What this means is that investing in this precious metal can be a strategy to lower the overall risk of your portfolio. If you believe that everything is great with our economy and that stocks are going to keep going up, then you’re probably not worried about your nest egg. But if you have misgivings about the markets, and if you’re still concerned about the aftershocks of the recession that began in 2008, then investing in gold can be a viable strategy for protecting your portfolio against any potential future downturns in the financial markets.