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Why You Should Invest In Gold over the Long Haul and Not Play It Based On News

After falling to the lowest point since Britain voted to exit the EU in the week ended September 2, gold is heading north again – cue a fresh round of argument on if it’s the best time to buy gold.

by Nikolai Kuznetsov

The precious metal recovered after the US National Bureau of Labor Statistics said on Friday, September 2 that the US economy added 151,000 jobs in August, which came short of analysts’ expectation of a 180,000-job addition. The worse-than-expected job data eased fears that the US Federal Reserve could raise benchmark interest rate in the US as early as September. This bore a downward pressure on the value of the US dollar since the job data signaled that the US economy might not be as strong as thought.

Keen followers of the yellow metal probably already know that its price responds a lot to the movement of the US dollar, with both typically moving counter to each other. This particular bit of news was so positive for gold that its positive ripples pushed Indian gold loan stocks to a record high on Friday, September 2.

Just to be sure, gold loan companies are companies that give personal loans against gold.

However, it would only require another bit of positive new from the US economy to send gold down again. And if investors would have to keep trading off these bits of news, the odds of winning would be ridiculously against them.

Just as with most real-world investments, investors have to take the long view to achieve success with gold. That is even more important nowadays because of what recent history shows about gold. Consider this.

Here’s another 10-year period performance.

For any 10-year period since the turn of the millennium, gold has quite outperformed stocks – specifically S&P 500 and FTSE 100. That was not so for, at least, any ten-year period in the two decades preceding the millennium.

Here’s snapshot of the ten-year period preceding the millennium

These charts just about tell the story of why gold has grown in popularity as a ‘safe haven asset’ in the last two decades.

What this trend suggests is that the heydays of the world’s strongest economies are gradually winding up. This is evident in how the US keeps sending mixed news about the state of its economy. It is also evident in how other big economies around the world – namely China, United Kingdom and Japan – are struggling. Therefore, as long as the price of gold remains closely related to the US dollar, it would make sense to hold gold in one’s portfolio over the long haul.

Just in case you think the ongoing trend between gold and stocks is mere coincidence, here’s a more proof that this the new order – at least for the next two decades. McKinsey Global Institute published a study earlier in the year, advising that (equity and bond) investors may need to lower their optimism about potential future returns on their investments.

Researchers at McKinney say certain factors that have made both US and European equities and bonds outperform their respective 100-year averages in the last three decades are either declining in influence or have taken the opposite direction.

In the report, they put forward arguments for why the next two decades will see lower returns than recent generations have come to know.

This gives credence to the outperformance trend of gold against stocks in the last decade and half. And if stocks and bonds actually perform lower than historical standards in the next two decades, chances are high that gold will continue to outperform.

Therefore, instead of playing gold based on latest economic news, it could be worth it to become long-term oriented.

*This post was published according to the "Contributed Article Terms and Conditions"

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