3. Preserving Wealth: More Potential Strategic Benefits of Gold’s Diversification
Based on gold’s historical diversification and positive risk-adjusted returns during market turbulence, it has a track record of potentially helping to temper short-term volatility and limit drawdowns.
But an allocation to gold may support preserving wealth on a longer-term basis too, with its historical positive longer-term risk-adjusted returns during a variety of business cycles helping investors weather unforeseen risks and capital impairments that can erode a portfolio’s value over time. See the above chart for gold’s longer-term performance and how it can potentially influence portfolio construction during a variety of business cycles over time.
Gold’s liquidity may help with wealth preservation, providing investors a relatively deep and liquid trading market that may be a key benefit of holding gold strategically. With a historical trading volume on par with major debt, currency, and equity markets, the estimated average daily turnover of gold is more than US $162 billion, which is equivalent to US $41 trillion a year.4
And even during turbulent markets, like those experienced during March 2020, gold market liquidity has stood the test of time, with gold trading volumes hitting US $237 billion in March during the initial COVID-19 lockdown,5 providing investors ready access to a liquid trading market — or access to cash — when many other assets were declining in value.
Historical Store of Value
Longer term, gold can potentially provide a unique store of value for investors, helping to preserve purchasing power over time. Gold has kept up with rising prices by historically providing positive returns during periods of rising inflation, particularly during environments of extreme inflation.6
Additionally, gold has showcased its ability to hedge against currency debasement by historically maintaining a negative correlation to the US dollar.7 Taken together, gold’s ability to keep up with prices, in conjunction with currency depreciation, may potentially help investors maintain purchasing power and preserve value against inflationary pressures.
Gold for the Long Term
Investors may consider thinking about gold not just as a tactical asset to be used in times of crisis, but instead, as a long-term, strategic investment with unique and diverse potential benefits. Learn about the primary benefits gold may offer portfolios relative to other major asset classes, as well as its distinct contribution to portfolio strategy over the long run in Invest in Gold: A Portfolio Diversifier With Staying Power.