Take Shelter From the Coming Economic Storm – With Gold
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By Alice Walker
Investor Relations Manager at Bullion.Directory
There’s an old saying, “All that glitters is not gold”. However, when it comes to providing a safety net during economic crises, this proverbial phrase might just need an exception. In this article, we’ll explore the time-tested value of gold investment during turbulent times.
From understanding the role gold plays in your investment portfolio to formulating a solid strategy for its accumulation, we’ll lay the foundation for you to successfully navigate economic upheaval.
Understanding Economic Crises
In order to best utilize gold as an investment tool during troubled times, we must first delve into the heart of economic crises. These periods of severe economic downturn can occur from a plethora of triggers – imbalances in financial structures, economic shocks, dramatic policy changes, and as we found out recently, global pandemics.
It’s essential to understand their nature, frequency, and potential impact to help predict and prepare for the worst.
Economic crises are inevitable in an inflationary world, but understanding their regularity and pattern is essential to informed investing.
A closer examination of historical data reveals the cyclical nature of economic downturns and the important role gold can play in weathering them.
The National Bureau of Economic Research (NBER), the official arbiter of U.S. recessions, has identified 33 distinct periods of economic contraction since 1857. This suggests an average of one roughly every five years. However, this frequency varies greatly. The late 19th and early 20th centuries saw frequent short downturns, while the latter half of the 20th century experienced fewer but lengthier recessions.
In recent years, the period between recessions has extended.
The economic expansion following the 1991 recession lasted a decade, ending with the 2001 dot-com bubble burst. The subsequent period of growth ran for six years before the 2008 Financial Crisis.
Most recently, the expansion following the 2008 crisis spanned over a decade, the longest in U.S. history, until it was halted by the 2020 COVID-19 pandemic.
These periods of economic expansion and contraction are often referred to as the business cycle. It’s important to note that while we can identify averages and patterns in these cycles, predicting their exact timing and severity is far from an exact science.
The regularity of recessions underscores the need for a durable investment strategy capable of withstanding periodic economic downturns. This is where gold comes into play.
Its historical performance during recessions, coupled with its intrinsic value, makes it an appealing investment during these unstable periods.
As we’ll see, gold’s value often increases during economic crises, making it an effective hedge against recession-induced market declines. Investors who understand the cyclical nature of economic downturns and who strategically incorporate gold into their investment portfolios stand to benefit during these challenging periods.
Investors who fare best during economic crises are not those who try to time the market but those who have a solid, diversified portfolio in place.
This includes a strategic allocation to gold that serves both as a hedge against downturns and an investment that can appreciate over time.
Gold: A Safe Haven During Economic Instability
Gold has long held its status as a valuable asset, with civilizations dating back thousands of years recognizing its worth. In the modern financial landscape, gold continues to serve as a beacon of stability amid the tumultuous sea of the global economy.
In the throes of the 2008 financial crisis, gold stood tall. As stock markets around the world crumbled, gold prices tripled between 2007 and 2011, offering those invested in gold a critical safety net.
Such trends are not a one-off event either, with similar patterns observed during other times of economic unrest – the most recent being during the pandemic, when gold reached a new all-time high.
An Investment Strategy for Gold: Not a Reaction, But a Plan
When it comes to investing in gold, especially during crises, the importance of a well-thought-out strategy cannot be overstated.
Investing in gold shouldn’t be a knee-jerk reaction to a sudden economic downturn, but a calculated part of a balanced and diversified investment portfolio.
I have a client named Bob, a seasoned investor, who is always methodical and disciplined with his investment decisions.
Over the years, Bob would gradually build his gold holdings during stable economic periods. Then, when crisis hit, while others scrambled to buy gold, Bob could sit back and watch his pre-established gold investments appreciate. He would sell a portion of his gold (always leaving a core) when the metal reached a high and buy up undervalued stocks that had taken a hit, ready to ride them back up in the next boom – and he repeats this process each cycle.
Diversifying Your Gold Investments
There’s more than one way to invest in gold, and diversifying your gold investments can be as crucial as diversifying your overall portfolio.
Gold bars and coins, while tangible and satisfying to hold, are only one facet of precious metals investment. There are also gold Exchange-Traded Funds (ETFs), gold mutual funds, and Gold Individual Retirement Accounts (IRAs) – and of course there are other precious metals.
Each method of gold investment carries its unique set of pros and cons.
Physical gold, such as bars and coins, offers the security of a physical asset. But this also means you need secure storage, and its liquidation may not (always) be quite as quick as selling shares of an ETF. It helps if you have a good bullion or coin dealer in your city and we currently list almost 800 gold dealers across America.
Gold ETFs and mutual funds, on the other hand, are easily traded, but they are susceptible to factors like management fees, which can affect their net asset value.
A Gold IRA provides a tax-advantaged avenue to invest in gold, but it also requires adherence to certain rules set by the Internal Revenue Service.
This may sound daunting but top gold IRA specialists will make this process easy, often at no charge, so this perceived disadvantage is nothing compared to the tax-advantages to be gained.
The Potential Pitfalls of Gold Investment
Despite its many virtues, gold is not without its risks. Its prices can fluctuate dramatically over short periods, and during stable economic times, its performance may lag behind other investment opportunities.
Moreover, gold doesn’t provide dividends or interest (although you can actually lease your gold holdings to provide an interest-like income). Your profit from gold investment lies in the potential appreciation of its value over time.
Balance is key. A portfolio over-saturated with gold can potentially lead to missed opportunities when the economy is flourishing. Conversely, having no gold in your portfolio can leave you exposed during a crisis.
Practical Tips for Gold Investment During Economic Crises
Understanding the why and what of gold investment during economic crises is only half the battle.
The real test lies in how you implement this knowledge. Here are a few practical tips to make the most of your gold investments during economic downturns:
- Stay Informed, Not Impulsive: During crises, the market can be a frenzy of activity. Amid this chaos, it’s essential to make informed, rational decisions rather than being swayed by fear or greed. Bullion.Directory is a good source of market news and impartial dealer ratings and reviews.
- Timing is Crucial: The adage, “buy low, sell high,” rings especially true for gold. Acquiring gold during economically stable periods and holding onto it during downturns can be a highly effective strategy.
- Diversify, Diversify, Diversify: While gold can be a solid pillar in your portfolio, it should be complemented by a diversified mix of other assets. This approach can help you navigate through various economic climates.
Economic crises are an undeniable reality of our financial landscape. They bring with them periods of uncertainty and volatility but also unique opportunities for those well-prepared.
Strategic gold investment during these times can be a financial buoy, keeping your investment portfolio afloat while others sink.
The path to successful gold investment during economic crises is paved with understanding, strategy, diversification, and patience.
Whether you’re a seasoned investor like Bob or just beginning your investment journey, having gold in your arsenal can be a game-changer when economic storms hit.
Bullion.Directory or anyone involved with Bullion.Directory will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading in precious metals. Bullion.Directory advises you to always consult with a qualified and registered specialist advisor before investing in precious metals.
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