Gold is a solid addition to an investor's long-term portfolio. The yellow precious metal has a very long history of being a store of wealth and value. It could continue to do what it does best in the coming years and beyond. Here's the full story.

KANATA, ON / ACCESSWIRE / August 27, 2021 / The investment world is buzzing these days with meme stocks, cryptocurrencies, non-fungible tokens (NFTs), self-driving cars, virtual reality (VR), and so on. However, in the midst of all this, there's one asset that shouldn't be ignored: gold. The shiny, yellow precious metal could be the ultimate real asset for the long-term portfolio.

Currently, gold trades at around $1,800 an ounce. So far this year, gold prices have dropped roughly 5%. But that could be great news for those who are looking to own it.

Not too long ago, gold prices made an all-time high at around $2,089 an ounce. But here's some perspective on how gold prices have done over the years. Take a look at the following monthly chart of the price of gold futures from 1975 to 2021.

Over the past five years, gold has increased over 32%. And the last 15 years saw the yellow metal gain of over 187%, with the 20-year return on gold being over 533%.

How has gold done relative to the stock market?

The last 50 years (essentially, from when it was allowed to trade freely on financial markets), saw gold increase by over 4,000% while the Dow increased 3,900%.

Now the big question: Does gold really have a place in the long-term portfolio? It sure does.

Gold has a vibrant history, and understanding its past will reveal its importance, as well as what it could do going forward for the long-term portfolio.

Historical Significance of Gold

Let's just say this: gold's history is as rich as human history. The malleable metal has been around for many years-longer than any other asset other than land. As such, it's hard to see it going anywhere anytime soon.

Gold started being used as a currency around 560 B.C. because merchants needed a standardized form of money to simplify trade. Gold coins (which were stamped with a seal) subsequently grew in importance throughout the Greek and Roman Empires.

Then in 775, Great Britain developed its own metals-based currency (the pound symbolizes a pound of sterling silver).

Not only did gold represent a medium of exchange and store of value, but it was also becoming a symbol of wealth in Europe, Asia, Africa, and the Americas as well.

Then, in 1792, the U.S. government started something new - the bimetallic standard. Essentially, it required that every currency be backed by either gold or silver. And so, the "gold standard" was born.

Sadly, though, it didn't last for too long. By the 1900s, gold was phased out of the monetary system. In 1934, at the height of the Great Depression, President Franklin D. Roosevelt signed the Gold Reserve Act of 1934.

The act essentially stated that individuals could sell their gold to the U.S. Treasury for a fixed price of $35.00 an ounce, and it put an end to the minting of new ones. The rate of $35.00 an ounce of gold was artificially kept until around 1971, when gold was allowed to trade freely on the market.

There's one major takeaway here when looking at gold's history…

Gold experienced many tests throughout human history-be it political uncertainty, civilizations ending, the formation of new nations, wars, recessions, depressions, or periods of growth. The precious metal retained its value during those challenging times, and humanity repeatedly returned to it as a store of wealth.

Benefits of Holding Gold within the Portfolio

Thanks to its ability to preserve wealth, gold is often used as a safe haven in times of political and economic uncertainty.

Because of gold's value-holding ability, many central banks' balance sheets show that they hold almost one-fifth of the world's supply of above-ground gold.

Fun fact: central banks have been net buyers of gold since around 2010. And it doesn't look like they will stop buying anytime soon.

But that's not all. Gold has other functions as well.

Inflation Hedge

Gold provides protection against inflation.

With the large amounts of stimulus in the economy and the speed of the COVID-19 rebound, many fear that inflation will rear its ugly head. By how much and for how long is still unclear, with many pundits saying that the current inflation is transitory; time will tell.

Why would owning gold help us deal with inflation over the longer term? Consider this: according to the U.S. Bureau of Labor Statistics (BLS), what you could buy for $1.00 in January 2000 would cost you $1.62 in July 2021. This means the dollar's value declined by 62%, or another way to look at it is that inflation has deteriorated your wealth by 62% over that time.

What happened to gold during that same period? Gold prices increased 527% between January 2000 and July 2021!

Diversification

With bond markets offering little yield and signs the stock market rebound is running out of gas, investors may start to fall back on civilization's oldest store of wealth.

When the stock market crashes, investors need non-correlated exposure to assets to smooth out volatility (when one zigs, the other zags). If you're invested 100% in equities, you could suffer tremendous losses in a crash, but those smart enough to diversify across various asset classes, including gold and other hard assets, get hurt less.

How much should you allocate? Typically, having 5% exposure of your portfolio could be considered an appropriate amount. Your age and risk tolerance affect this, of course.

Returns

Gold can not only be an effective diversifier but also enhance returns. An example of this is the financial crisis of 2008-2009. Initially, gold prices dropped just like every other asset. But as fear of the financial system collapse grew (and it became evident that we were experiencing a crisis like no other), there was a gold rush and gold prices shot higher.

While looking at the following chart, consider that gold was trading around $208 an ounce by the end of 90's. But from March 2000 to March 2021, gold saw its price increase, generating annualized returns of over 19%. Adjusted for inflation, that's 14.7% annualized.

And this happened during three crises - the tech bubble, the global financial crisis, and now the pandemic.

Gold vs. Crypto

There's a big debate going on these days. The hot topic of discussion is whether Bitcoin is better than gold.

Remember that gold has been a time-tested asset. The metal has gone through many phases throughout humanity's history. Gold held its value as empires ended. It even held its value during wars, recessions, depressions, government changes, and much more.

On the other hand, Bitcoin is a very new phenomenon. It was created in 2009 and didn't get much traction until recently. And it really hasn't gone through any major crisis yet.

Bitcoin has been a very volatile asset. Since it trades 24/7, it's constantly on the move.

We have seen Bitcoin go from $1,000 to roughly $20,000 between 2017 and 2018. It then crashed back to $3,500 in 2019. It then skyrocketed again to $64,000, only to crash back down to about $29,000 in a very short period. Now that's volatility!

In contrast, you won't see gold be this volatile. Of course, gold prices fluctuate but nowhere close to Bitcoin's magnitude. Gold is an asset that anyone can own, and it's recognized globally. An ounce of gold is as precious in the U.S. as it is in China or India, for example.

Bitcoin has some major problems. Its ownership is highly dependent on a few "whales." And, it may be legal to own Bitcoin in the U.S., but it could be a banned asset in other countries.

How to Invest in Gold

The most straightforward method is owning tangible gold by buying gold bullion such as in the form of bars of various sizes, or gold coins stamped with serial numbers. Depending on size and quantity, this type of holding can be illiquid, with higher holding costs for storage and insurance.

That said, thanks to financial innovations over the years, there are many ways to get exposure to gold. For instance, there's a cost-effective method of owning gold bullion, and that's through gold exchange traded funds (ETFs). Buying into the fund essentially makes you an owner of that gold, but any storage and insurance costs are taken care of.

For investors who are willing to take more risk for higher returns, gold mining stocks could be a place for them as well. These are highly correlated to gold prices. Consider this: a gold producer producing an ounce of gold at $800 and selling at $1,800 nets about $1,000 an ounce. If gold prices increase to $3,000 and the metal continues to be produced at $800, then its profit surges by 150% while the price of gold increases only 66%. The stock price reflects this, and it increases as a result.

But, with higher potential gains comes higher volatility, challenging gold's safe-haven status. Perhaps a better way to get exposure to these mining stocks is to own ETFs that hold mining stocks. This provides investors with diversification, which can help reduce volatility.

Final Word

At a time of rising inflation and uncertainty over the long-term impact of governments' stimulus programmes, allocating part of your portfolio to gold could help protect your investments.

Investors recognize the value of holding gold in times of turmoil. That's a reputation hard won over thousands of years. The key is in understanding the role gold plays in a portfolio. It's a proven diversifier with low correlation to stocks, and its ability to hold value makes it a decent hedge against inflation and the erosion of fiat currencies.

But beware, gold has seen tremendous volatility and has suffered through lean years during booming stock markets. Ultimately, gold could add some valuable protection against the rise of inflation and the rising risks of a market crash.

Is there any asset that's as golden as gold in terms of what it can bring to a portfolio? Not likely!

About the Author: Portfolio manager Fabien Ouellette CMT, CFTe, CIM, FCSI has a diverse and impressive history. Originally from Montreal and fluently bilingual, he served in the Canadian Military. After a decade of service, he branched out into financial planning and asset management, where he has spent the last three decades successfully advising individuals, families, and businesses on their financial needs. He is an oft sought-after public speaker and trainer delivering retirement planning, investment management, and change management workshops to corporations and government departments including the Senate, Foreign Affairs, Public Works, National Research Council, the RCMP, Pfizer Canada, the University of Ottawa, and others. Additionally, he publishes technical analysis research to portfolio managers and financial advisors across Canada and the U.S and is often called upon by celebrities and media personalities for his financial expertise. Fabien has been a guest speaker at Larry Berman's national educational events and on radio shows such as CFRA's "Experts on Call". He and his lovely wife Jane have lived in the Ottawa region for over 30 years and enjoy traveling the globe. Fabien is also a musician and an avid competitive chess player who mentors younger players. Connect with Fabien Ouellette and learn more on the WealthLife Capital website.

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Contact Person: Fabien Ouellette
Address: 555 Legget Dr, Ste 304 Tower A, Kanata, Ontario K2K 2X3
Phone Number: 613-599-8885
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Website Link: https://wealthlifecapital.com/

SOURCE: WealthLife Capital

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