Should Stock Market Traders Buy Gold To Protect their Portfolios?

It has often been said that Gold is the No. 1 “safe haven” in harsh economic times.

Research seems to bear that out – between mid-2007 and 2009, gold prices went from $940 an ounce to nearly $1,220 an ounce. That’s more than a 33% gain at a time when equity prices, real estate prices and the value of the greenback were in a freefall.

That alone is reason enough to make investors want to add gold to their portfolio… And they have.

But with the strength of the dollar rising in the wake of the euro’s near collapse and the still-green shoots of recovery pushing up into the sun, you might need more than one reason to keep or add gold to your portfolios.

5 Reasons to buy gold today

In 2009, investors bought a total of 573 tonnes of gold through exchange-traded funds (ETFs). That’s 20.2 million ounces and, at the average price per ounce in 2009, that’s an investment of $19.6 billion!

And now, with the eurozone’s near collapse sending the dollar shooting higher and volatile global markets turning investors into quivering mice, smart investors are running back to the one asset they can count on: Gold.

Today, I’m going to share five reasons why you must join them – before it’s too late.

Reason #1: Soaring global debt

Do you know how much money the European Union (EU) decided to raise to bail out Greece? A cool
$1 trillion. Add to that the SDR4.8 billion (SDR means “Special Drawing Rights”) in outstanding purchases and loans from the IMF, and Greece is in a massive debt hole that’s threatening to collapse the whole European Monetary Union… And that’s just one country in the IMF’s accounts.

Remember Iceland’s breakdown in 2009? Its outstanding purchases and loans figure is 654.76% above its IMF quota.

In fact, the IMF’s member countries are SDR1.3 billion in arrears as of May 31, 2010. That’s the amount of money from IMF loans that are at least six months overdue. These countries are weighing down the global economy, and any economic fears will increase interest in gold as a safe haven.

Reason #2: Overextended dollar

With the euro crumbling, investors are seeking the safety of the US dollar. Against the euro, the dollar has climbed as much as 21.3% in the first half of 2010. But has the dollar really climbed in value?

No… Government debt continues to climb above $10 trillion. The Federal Reserve won’t even print the true total amount of dollars and dollar promises (read T-bills, etc.) in circulation. Interest rates are still at near zero, and have been for more than a year and a half.

The American consumer still feels strapped and our jobs growth is hardly making a dent in unemployment.

That means the growth in the dollar’s value is mainly due to the pain and suffering in Europe. That’s nothing to hang your hat on, and it’s certainly a reason to put gold in your portfolio.

Reason #3: Stability and growth

The fluctuations in gold’s price means there’s a strong inverse correlation with the dollar’s value. That’s what makes it such a great hedge against a falling dollar. When the dollar drops, gold prices climb, and vice versa. It’s a very stable relationship.

This is because gold is priced in dollars, so when value is eroded, it takes more dollars to buy the same amount of gold.

But here’s the thing… When the dollar falls sharply during tough economic times, investors flock to gold. When demand for gold climbs, so does the price, since we’re not making any more of it! That means you can see profits from investing in gold above and beyond the hedging protection it offers you and your portfolio.

Reason #4: Latent inflation

Right now, with the global economy still a bit wobbly from the worldwide recession, the world hasn’t been hit with skyrocketing inflation — like it should be, considering the amount of freshly minted dollars governments have flooded the market with in the past two years.

But with the stimulus programs (read, printing programmes) and the absurdly low interest rates governments keep holding, we’re, in effect, creating a bit of an inflation “bubble.”

Keep credit and borrowing cheap and hand out new dollars and you’re going to have to pay the piper at some point. This latent inflation will send our economy into a tailspin once the rest of the world gains its footing. All the more reason to buy gold.

Reason #5: “Blood in the streets”

Everyone knows the “Blood in the streets” theory…

Even Warren Buffett says when people are panic-selling, that’s the time to buy. His thinking is that you’ll get some great deals, and he should know. But Buffett is a long-term player. He thinks in decades, not months or seasons, or even weeks like some investors.

“Blood in the streets” also means people are scared and not willing to put their money at risk. Instead of investing like Buffett, they sell, sell, sell, creating a self-fulfilling prophecy that sends markets sharply lower, which incidentally sends more people to the safety of gold.

We’ve seen moments of panic in our markets, even after the recession was deemed over. The month of May was really turbulent, while June saw the JSE drop sharply. Meanwhile, gold climbed back above $1,200 an ounce during the same period.

What’s your next step?

These five points should have convinced you to think of adding gold to your portfolio.

By Sara Nunnally