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GOLD IS CONSIDERED TO be the world’s first currency. The yellow metal was melted into gold coins created by King Croesus of Lydia around 550 BC and circulated in many economies well before the creation of paper money. Today, Western investors view gold as an alternative asset, a commodity, a quasi-currency, a portfolio diversifier and an inflation hedge. So-called “gold bugs” invest in the metal to protect against global gloom-and-doom scenarios. But average investors might want to diversity into gold as well, experts say.
Investment demand for gold rose 4 percent to 279 tons in the first quarter of 2015, according to the World Gold Council. The metal is currently trading around $1,208 per ounce, a 2.1 percent gain since the start of the year, but down from its 52-week high of $1,338.70. Here are three reasons you might consider adding some of the yellow stuff to your portfolio.
Portfolio diversifier. The goal of any balanced portfolio is diversification, and gold can play a part, experts say. “You want a portfolio of noncorrelated assets, and the statistical correlation between gold and stocks is virtually zero,” says Jeff Christian, managing director at New York-based CPM Group, a commodities research consulting firm.
Returns aren’t too shabby, either. From 2001 through 2014, the annualized return for holding gold bullion was just over 12 percent, according to Peter A. Grant, chief market analyst at USAGOLD, a Denver-based coin and bullion investment firm.
“An allocation to gold has been shown to protect and enhance returns while reducing volatility,” Grant says.
Safe haven. Gold has traditionally been viewed as a safe investment that climbs in value during times of geopolitical crisis or political instability. “A lot of people who invest in gold look at it as insurance in your portfolio against catastrophic financial market failure, severe economic problems or war,” Christian says.
For example, one of the factors that helped propel gold to its all-time high in 2011 above $1,900 per ounce was news that Standard & Poor’s downgraded U.S. government debt for the first time. The downgrade occurred after a debt ceiling battle in Congress that took the U.S. to the brink of default.