Diversification is one of the key principles of investing. If an investor chooses to ignore diversifying their portfolio, they could risk losing everything if that one particular investment collapsed. The majority of investment portfolios are usually made up of financial assets like stocks and bonds. By diversifying your portfolio, you are achieving additional protection from fluctuations in the value of any single asset or group of assets. The risk factors that may affect the price of gold are very different from factors that affect other assets and asset groups. In the past gold has behaved countercyclically to most other assets, making gold an ideal option for diversification.
Gold holds value against all currencies directly, making it an important trade for protecting against rising inflation rates, currency debasement or indeed a currency crisis. Gold, in turn, offers a way for investors to protect their wealth and purchasing power.
As a rule, when the value of the dollar decreases relative to other currencies worldwide, the price of gold tends to increase in U.S. dollar terms. In theory a weaker US dollar makes gold more affordable, which increases the demand for gold which in turn drives up its price. With the opposite also being true, we can say that gold tends to have a negative correlation to the dollar.
Inflation is a measure of the rate of rising prices of goods and services in any given economy. Inflation makes money saved today less valuable tomorrow which is a concern for consumers as it diminishes their purchasing power over time.
Gold and silver are considered a hedge against inflation, and inflation is one of the key risks for economy-based investments such as stocks. Gold is viewed as a safe-haven asset; when other markets crash, gold typically sees its value increase. Inflation and a declining dollar typically results in rising gold prices.
By purchasing gold, people can shelter themselves from inflation and times of global economic uncertainty.
By adding gold to your portfolio, you can protect your wealth, and potentially help it grow. Owning some gold and silver could even be said to act as an insurance against severe market turmoil. Historical data shows that gold can act as a form of "investment insurance", a way to smooth risk and return, and reducing overall losses when stocks, bonds or real estate fall sharply. The price of gold doesn’t typically move in the same direction as other asset classes. This in turn can help reduce the impact of any unexpected losses elsewhere in an investment portfolio.
Investors can even then diversify within their precious metals holding, buying gold, silver, platinum or palladium in an attempt to further mitigate risk.
The price of gold, as each price, is determined by the market forces of demand and supply.
Gold mining and supply is a global business with operations on every continent, except Antarctica, and gold is extracted from mines of widely varying types and scale.
Gold is one of the oldest means of exchange known to mankind. The yellow metal has been in demand for centuries. Even today, the demand for gold is driven by industry and technology use-cases such as in electronics and dentistry. There is demand from individual investors, companies and central banks alike. Physical bullion is a heavily traded asset class. Due to its high demand, it is highly liquid and can be converted to cash in almost any currency with relative ease.
Overall, gold is one of the most highly-desired and useful metals in the world.