Yoshikami: Four Things You Need to Know About Gold Now
Gold is negative for the year and has caused some to say it is time to abandon this metal as an investment. After all, isn't gold supposed to rise consistently every year and always rise when equity markets drop?
Since the price of gold has not ratcheted up in this latest Europe driven downturn, some say surely that must mean that the wisdom of owning gold is now null and void.
I disagree; gold should still be a part of your investment plan.
Here are a few thoughts to keep in mind as you consider investing in gold for your portfolio strategy.
1. Recognize that investing in gold is not a guaranteed positive return investment every year; gold can and will lag other asset groups depending on the current environment. This is particularly the case when liquidity becomes a concern in global markets and gold is sold to raise cash. Remember, this asset will rise and fall in value like any other asset; a longer-term time horizon is required when buying this precious metal.
2. Central banks will continue to diversify out of US dollars and European currency. Having just returned from Asia this week, it never ceases to amaze me the level of skepticism that businesses and governments have regarding the fiscal prudence of US and European leaders. The bottom line is they simply don't believe that responsible decision-making will occur leading to currency stability. For that reason, central bankers around the world will continue to buy gold as a substitute for unstable currencies.
3. India and China will continue to consume record amounts of gold as affluence rises. One only needs to spend time in Macau or Bombay or Shanghai to see that the demand for gold has never been higher as emerging countries continue to increase wealth. in India and China, gold is symbolic of good luck, affluence, and status. Despite the bumps that India and China might encounter in their economies, gold consumption will continue to accelerate.
4. One day inflation will emerge. And when inflation does rise, tangible assets will provide some level of inflation protection. Given the incredible stimulus policies around the world, it's hard to imagine that pent-up inflation is not bubbling below the surface in global economies.
Assets such as commodities and other tangible goods tend to do well in inflationary environments. Gold is no exception to this trend.
While it is tempting to be shortsighted when investing in any asset, it is critical that one analyze the role of each position in a portfolio strategy. This analysis is required to assure that a plan for investment factors in not only what might go right with an investment plan, but also what might go wrong as well.
When inserting gold into your strategy, make sure it is part of an overall plan. Do not get caught up in short-term price movements when building a long-term investment allocation. There have been many times in the past when gold has underperformed other capital assets only to see valuations roar back. Don't get left behind when gold makes its latest recovery.
And be prepared to increase your position when inflation begins to emerge. Be tactical but long-term in perspective and make gold part of your offensive and defensive investment strategy.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.