For much of the past two decades, you'd have done better putting your money in a shiny inert metal, than investing in the STI.
Gold is known by many as the "barbarous relic." It doesn't earn interest. You have to pay storage costs to hold it. It isn't used for industrial reasons. And its price swings have lost plenty of speculators' money.
Warren Buffet is an outspoken critic of gold:
"It gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
After all, gold's long-term total returns would discourage most investors.
Gold underperformed all but Japan's Nikkei index over the past 30 years. This is a major knock against holding gold.
But Buffet – and all those who take his every word as gospel – are making a major mistake.
Why? Because they see gold as an investment… not insurance.
(There are a lot of other reasons to invest in gold. We outline them in a free report you can download here.)
An investment is something in which you expect to earn a return of capital. Gold investors buy hoping to sell at a higher price. They're upset at gold's violent price swings on a day-to-day basis.
It makes much more sense to view gold as a form of insurance.
Insurance is a hedge against the possibility of catastrophe. People buy car insurance. Home insurance. Or life insurance for your family. Even cash is a form of insurance.
You buy insurance to have peace of mind. It costs money for insurance. But the cost is small in the event of catastrophe.
Gold should be looked at in the same light. Gold is insurance for your overall portfolio. It's a form of diversification, or part of an asset allocation model. It's what you should have in your portfolio in case of (for example) an unexpected Brexit vote that smashes global stock markets.
Even holding just a 3 percent allocation in gold could help save your portfolio in the case of a financial meltdown.
For example, say you have a S$100,000 portfolio with 97 percent in stocks (S$97,000), and 3 percent in gold (S$3,000).
A new bear market comes and stocks drop by 20 percent. Your S$97,000 worth of stocks drops to S$77,600. If gold doubles (although it's risen as much as 500 percent in past crises) from its current price of S$1,250, it would raise your gold holdings to S$6,000.
Without gold, your portfolio would drop 19.4 percent (if the 3 percent were in cash instead of gold). With gold, your loss would be 16.4 percent – saving you S$3,000. That's still a big decline. But a small holding of gold provides a lot of insurance.
Gold also has a negative correlation to stock markets. Correlation is the relationship or connection between two or more assets. It doesn't mean that one asset directly affects, or causes, the other one to move. It just measures what generally happens to the price of one asset when the price of another asset changes.
A positive correlation means that two or more assets move together and in the same direction in response to the same event.
A correlation of 1 means they are perfectly correlated. Both assets move up or down together. A correlation of -1 means they are negatively correlated. If one asset moves up, the other moves down.
In the table below, you can see gold's correlation to major markets around Asia as well as the S&P 500.
Gold has a low correlation with most of these indexes. That means when these markets go down, gold usually goes up – and when gold goes down, these markets go higher.
Most major Asian stock markets are positively correlated – that is, they all tend to move in the same direction at the same time. That means negative events usually affect all markets in the region. So if you're invested in Singapore and Hong Kong, for example – which have a correlation of 0.85 – the chances are good the two markets will rise and fall together. That's not diversified.
But by diversifying part of your portfolio into gold, you can reduce portfolio risk. Gold's correlation with the STI is a relatively low 0.28; and it's just 0.07 with the S&P 500. Through diversification, not everything in your portfolio will move in the same direction at the same time.
Having just a small allocation to gold and knowing your portfolio is hedged against a pullback will allow you to sleep well at night. It's another reason gold is a great insurance policy for your portfolio.
You don't buy home insurance hoping a flood, fire, or disaster hits. You buy it to protect your possessions.
Gold is a form of insurance. Buy it to protect your portfolio… hoping to never have to use it.
One of the easiest ways to own gold is to buy the SPDR Gold Shares ETF (exchange-traded fund). It trades on the Singapore exchange under code O87. It is backed by physical gold and allows you to track gold prices through your brokerage account.
There are many other compelling reasons to buy gold right now. You can read about them by downloading our free gold report here.
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The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.
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Kim Iskyan is the publisher of Stansberry Churchouse Research, a Hong Kong and Singapore-based independent investment research company, and the editor of Asia Wealth Investment Daily, a free daily e-letter with actionable insight about Asian investment, finance, and economics. He has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in emerging and frontier markets.