In our previous blog posts, we explored the investing essential for a better financial future, the benefits of passive investing, and how to maintain a long-term focus amid market highs. We also shared our proven strategies to navigate any potential market downturns. As we continue to see resilient bull runs, there is a growing concern about the potential for significant market downturns. Today, we will discuss one way to mitigate such market risks.
What?
The iShares Gold Trust ETF (IAU) is an exchange-traded fund that tracks the price of gold. IAU is the second largest gold ETF, managing $29 billion in assets, behind GLD (SPDR Gold Shares) which has $64 billion. However, IAU's expense ratio of 0.25% is significantly lower than GLD's 0.40%
As concerns about a potential stock market bubble and a major market correction grow, it may be worth considering gold as a safe-haven asset. Gold has historically been a reliable store of value during times of economic uncertainty and market volatility. The IAU ETF provides a cost-effective and straightforward way to invest in gold without the need to physically own and store the metal.
So What?
The chart below shows that the IAU ETF grew its value significantly during the pandemic-induced stock market downturn in early 2020. While the broader market, represented by SPY, experienced a sharp decline, IAU performed well as investors flocked to gold as a safe-haven asset. Similarly, during the 2022 market downturn, IAU preserved its value well, demonstrating gold's ability to act as a hedge during periods of market volatility and economic uncertainty.
If you see potential risks of a stock market correction in the near future, here are good reasons to consider gold in your portfolio:
Geopolitical Risks and Economic Uncertainty: Ongoing geopolitical tensions and economic uncertainties continue to bolster demand for gold as a safe-haven asset. Historically, gold prices tend to rise when there is increased uncertainty in the stock market.
Inflation Concerns: With persistent inflationary pressures, gold is seen as a hedge against inflation. The purchasing power of fiat currencies erodes over time, making gold an attractive investment to preserve wealth.
Central Bank Buying: Central banks, particularly in China, are continuing to accumulate gold. This sustained demand supports higher gold prices.
Underrepresented Asset Class: Despite its historical stability, gold remains underrepresented in many investment portfolios. As market conditions become more volatile, investors may increasingly turn to gold, leading to greater demand and potential price increases.
Now What?
If you are concerned about the potential for a stock market correction, adding gold to your portfolio through an ETF like IAU could be a prudent move. Here are a few steps and considerations:
Evaluate Your Portfolio: Assess your current portfolio allocation and risk tolerance. Determine what percentage of your portfolio should be allocated to gold or gold-related investments. A common recommendation is to allocate 5-10% of your portfolio to precious metals.
Understand the Risks: While gold is a safe-haven asset, it is not without risks. Gold prices can be volatile, and the value of gold ETFs can fluctuate based on the market price of gold.
Invest Gradually: Consider dollar-cost averaging into your gold investment. This strategy involves buying a fixed dollar amount of gold ETFs at regular intervals, which can help mitigate the impact of market volatility.
Stay Informed: Keep an eye on economic indicators, geopolitical developments, and market trends that could impact gold prices. Regularly review and adjust your investment strategy as needed.
Concluding Remarks
In the current economic climate, characterized by fears of a stock market bubble and potential correction, investing in gold through an ETF like IAU can provide a valuable hedge and diversify your investment portfolio. Gold's resilience and historical performance during times of market stress make it a compelling addition to consider. However, it is essential to stay informed, consult with a financial advisor, and strategically manage your investments to align with your financial goals and risk tolerance.
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