Ways of Gold be an Effective Portfolio Diversifier

Gold (Chemical Symbol-Au) is primarily a monetary asset and partly a commodity.Gold is the world's oldest international currency.Gold is an important element of global monetary reserves.

The gold market is highly liquid. Gold held by central banks and other major institutions and in the form of retail jewellery is reinvested in the market.

Effective diversification during “stress” periods: Traditional methods of portfolio diversification often fail when they are most needed, that is during financial “stress” (instability). On these occasions, the correlations and volatilities of return for most asset classes (including traditional diversifies  such as bonds and alternative assets) increase, thus reducing the intended “cushioning” effect of a diversified portfolio.

Inflation: When inflation rises, the purchasing power of people decreases. Therefore, during times of inflation, people would prefer to purchase liquid, tangible assets that are valued for some other purpose. Since gold is in no way related to any specific government policies, it is not affected by inflation. So, it acts as a hedge against inflation.

Low or Negative Real Interest Rates: Gold has a long history of being an inflation-proof investment. Inflation and interest rates are inversely related. When inflation rises, interest rates are relatively low and so investors show less interest to invest in interest-bearing instruments. Hence, they tend to buy gold to protect their capital.

War, Invasion, Looting, Crisis,Bomb Explosion, Unsecured environment : In times of national crisis, people fear that their assets may be seized and the currency may become worthless. They see gold as a solid asset, which will always buy food or transportation. Thus, in times of great uncertainty, particularly when war is feared, the demand for gold rises.

Cultural Differences and Sentiments/Customs: In countries like India and China, gold is bought more as a part of tradition rather than with an investment objective. During certain festivals, such as Dassera and Deepawali and during marriage seasons the demand for gold increases and this is obviously a major reason for increase in the price of gold during such times.