Currently, rising inflation is causing problems around the world. The cost of household items such as groceries, petrol and healthcare are increasing, and if overall prices rise faster than the average Australian’s income, they will be able to afford fewer goods and services over time.
For the everyday investor this makes it difficult to decide how to invest. There is uncertainty in commodity and stock markets as conflicts and trade disagreements create volatility, and the COVID-19 pandemic persists.
Pew Research studied 44 countries and found that 37 experienced first-quarter inflation in 2022 that was at least double the previous year. So, with costs of living rising worldwide, where can parents, carers and guardians invest their spare cash?
“Safe” investments might not be the answer to inflation.
A well diversified investment portfolio can help you to weather a period of inflation and uncertainty, but with economic turmoil extending all over the world, it may be a good idea to look for strong financial safe havens.
Why is Gold a good investment?
Gold has long been a haven in times of uncertainty. It offers several advantages over other long-term investments, like real estate, bonds, and dividend stocks.
Firstly, gold serves as a store of value. Physical gold has a life-long shelf life. And, because it is valuable in a time of uncertainty, it will always be a desirable asset. Even during a severe economic crisis, you will be able to quickly convert your gold for cash. In this sense gold is a genuinely tradable asset with very liquid properties (liquid referring to the ease at which something can be converted to cash).
Hedging and diversification.
Another advantage of gold is that it is an excellent hedge against inflation. Historically, there is a strong correlation between the price of precious metals and the inflation rate. This means that, unlike other assets, it retains its value in the face of rising inflation. You will not want to sell all your investments and hold only gold, but it can serve as an excellent hedging tool. Dedicating a portion of your portfolio (say 5-10%) to gold can help make up for assets that lose value or lag behind inflation.
Long-term returns from gold generally outpace inflation
Gold also provides a very reasonable long-term rate of return.
Consider the gold investment option currently provided by Itrust Invest. As shown on the chart below, if you had invested $1,000 in ASX:GOLD securities in March 2003, your investment would have grown in value to $4,486 by 30 June 2022 – an annual compounded growth rate of 8.1% per annum (net of investing fees).
Now compare this to the inflation rate over the same period. If you had purchased an item such as a television for $1,000 in March 2003 and fast forwarded 19 years to June 2022, that same television would now set you back $1,610 – an annual compound growth rate of 2.5% p.a.
Long story short – if you had invested $1000 in gold, then over this time you would be exceeding the inflation rate by 5.6% per annum. This supports our view that gold provides a hedge against inflation.
How much gold should you have?
Experts typically recommend making gold 5-10% of your total investment portfolio. At this level of investment, you will be able to enjoy diversification and take advantage of other investment opportunities while still enjoying some protection against inflation and uncertainty.
You can adjust your gold holdings depending on the current state of the economy, and investors using the Itrust platform can login and set their investment portfolio to include an allocation to gold at any time.
To wrap up
Because gold holds its value and purchasing power in the face of inflation and provides solid long-term returns, it is an excellent addition to every portfolio. This is especially true during 2022 as the whole world deals with economic uncertainty associated with the COVID-19 pandemic and the Russian invasion of Ukraine.
If you’d like further information on the investment options available on the Itrust Invest platform you can reach out to our expert investment managers by emailing firstname.lastname@example.org, calling us on 1300 811 119 or using the live chat feature on this page.
Disclaimer: It’s important to understand that past performance should never be relied upon to predict future performance. This blog contains general information only and has not taken into account your personal objectives, financial situation or needs.
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