Diversification of investment portfolio has been the mantra of any investor advisor for as long as the stock exchange existed. And for a good reason. Keeping all the eggs in the same basket has always proved to be ill-advised, especially when it comes to mobile assets.
The value of shares goes up and down function of many factors – predictability of the economic ecosystem, the competence of the management team, the rise and fall of need for a certain commodity or service, or pure good or bad luck. We don’t have to look far to see this. British Petroleum is the first example which comes to mind. The market value of the company fell nearly 22 percent over a period of nine days after the recent oil spill accident in the Gulf of Mexico, translating into a loss of approximately USD 40 billion from the company’s market value. One can honestly surprise whether the price of PB shares has any chance of recovery in the short to medium future.
The same goes for government bonds. Bonds are known to provide a more stable financial investment means and to be less inclined to extreme market variations. This is theoretically true, unless the bonds are issued by states with difficult financial situations, downgraded by international rating agencies, and during periods of social unrest. It is the case of Greece, whose governmental bonds were dubbed by Bloomberg and the European Federation of Financial Analysts Societies as the “the worst-performing government debt in the world” no farther than last December.
Not to mention that already in a popular economic ecosystem, the best performing shares and governmental bonds do not offer enough protection against the worst enemy investors have – inflation. We’re not talking about large extent investors, whose return of investment extent up with the amount invested, but about normal investors.
For this kind of investors, the different is the gold market. For several reasons. The most important is that the value of gold as commodity is not based on trust, as it is the case with shares and bonds. Gold value is based only on the market need, and as such, it has been increasing steadily and uninterruptedly for very long periods of time. The value increase has always covered the price of inflation, making gold one of the few investments able to protect against money depreciation. Equally important is the fact that the gold market is very liquid, meaning that there will also be buyers for gold, no matter the economic difficulties the rest of the global economy goes by.