ETFs can be used in a variety of situations, in the current time of crisis, investors are seeking safer assets. In this short note, we will explain the role of gold in periods of uncertainty.
As the financial world is worrying about the recent regional banking crisis in the United States (and now Europe), investors are once again seeking safety in the age-old safe haven of gold. The SPDR Gold Trust ETF (GLD), a gold-backed exchange-traded fund (ETF) that invests in physical metal bars, has attracted a staggering $1.2 billion in inflows since the onset of the crisis. Although GLD’s assets under management (AUM) are still below their peak levels, this surge in demand for gold-backed investments signals the enduring role of the precious metal in times of economic uncertainty. In this blog post, we’ll explore the reasons why investors flock to gold during times of crisis and discuss the merits of these backed ETFs as a financial refuge.
Why do investors see Gold as a Store of Value?
Gold has long been considered a reliable store of value, dating back to ancient civilizations that used it as a form of currency. Its scarcity, durability, and universal appeal have made it a symbol of wealth and stability throughout human history. This perception of the metal as a safe haven during turbulent times has persisted into the modern era, with investors often turning to the precious metal as an insurance policy against economic downturns and geopolitical instability.
Does it hedge against inflation? Possibly!
One of the primary reasons investors seek gold during times of crisis is its potential to serve as a hedge against inflation. As governments and central banks increase the money supply in response to economic challenges, the value of traditional currencies can erode, diminishing the purchasing power of individual investors. Gold, on the other hand, is a finite resource whose value tends to rise during periods of inflation. This makes it an attractive option for investors seeking to preserve their wealth in the face of mounting inflationary pressures.
Can it be added to my portfolio for “Diversification”?
Diversification is a key principle in investment strategy, as it helps to spread risk across a variety of assets and reduces the impact of any single asset’s underperformance. Gold is often seen as an effective way to diversify a portfolio, given its low correlation with stocks, bonds, and other traditional investment classes. In times of crisis, when stock markets and other asset classes may be particularly volatile or underperforming, gold can provide a stabilizing effect, helping to mitigate potential losses and balance out overall portfolio performance.
Safe Haven During Geopolitical Uncertainty
In addition to its role as a hedge against inflation and a diversification tool, gold is often sought out by investors during periods of geopolitical uncertainty. The precious metal’s value is not directly tied to the performance of any single economy or government, making it a relatively stable investment option in the face of global unrest. As tensions rise and the potential for conflict increases, investors may view gold as a safe harbour in which to park their capital until more stable conditions return.
If you want to invest in gold, make sure you talk to a financial professional and then consider ETFs for low-cost options. To gain key strategies and insights for successful investing, be sure to read our previous post to find out if you should be worried about the banking crisis. Access it easily by following the link provided.