Gold: A Hedge Against Growing Risks

08/08/2017 2:52 am EST


John Persinos

Managing Editor, Personal Finance

Launched in 2004, the SPDR Gold Trust (GLD) is the most popular bullion ETF and the most liquid physically backed gold offering available, notes John Persinos, contributing editor to Investing Daily's Personal Finance.

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Rising geopolitical risk, worsening dysfunction in Washington, DC, increased signs of inflation, and an overvalued stock market all add up to bullish conditions for gold.

We’re predicting a turbulent 2017, including a probable market correction. Gold is a time-tested hedge against crises, which are multiplying with each passing day.

During the Great Recession of 2007–09, the worst economic downturn since the 1930s, gold prices rallied from $840 per ounce at the end of 2007 to over $1,200 by the end of 2008, even though inflation over this period stayed in check.

The conditions that are favorable for gold will prove fatal for overvalued stocks that are looking for a trigger to tumble. That’s why we’ve increased our recommended portfolio allocation to 30% hedges, of which gold is an important component. The rule of thumb is that gold should make up 5%–10% of total portfolio assets.

After the yellow metal’s brutal pounding in recent years, it’s in the ascendancy. New data suggest that the inflation beast is stirring from its long slumber, which means investors will increasingly turn to gold.

To be sure, job creation remains modest, labor costs are low and energy prices have slumped again—all arguments against rampant inflation. But this argument ignores seven years of “easy money” and ultra-low interest rates. The bill for this extraordinary worldwide stimulus is about to come due.

Don’t get complacent; you need to start worrying about inflation. Inflation is currently running at a meager 1% and has been extremely low for years, prompting investors to forget how inflation can ravage their financial security.

The time to purchase inflation hedges is now, before the rest of the investment crowd belatedly tries to get in on the action and pushes up their prices.

Meanwhile, adding to international instability is the massive amount of private and public debt that’s sloshing around the globe. Even though the global recovery isn’t as strong as anyone would like, it is real and gaining traction.

As global turmoil and uncertainty show no sign of abating, the SPDR Gold Trust makes an effective hedge to protect you on the downside—while also offering considerable opportunity for appreciation.

Meanwhile, when the long-awaited stock market correction finally hits, a wide range of overvalued stocks are certain to take a dive, which is why we’ve pared back our recommended stock allocation to 35%.

The yellow metal maintains its intrinsic value despite a government’s ability to back its currency. Gold also is universally accepted around the world. When markets gyrate, especially due to overseas events such as a North Korean missile strike, historically the price of gold has tended to skyrocket.

Gold prices now hover at around $1,200. The analyst consensus calls for gold prices of $1,500 to $1,600 per ounce by the end of 2017. Those projections make gold not just a great way to protect your portfolio, but a smart moneymaking move as well.

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