NEW YORK ( TheStreet) -- Gold recently had a technical breakout surpassing $1,150 an ounce and history suggests that a pullback is likely to follow. Despite this, there are three reasons to consider adding the precious metal to a portfolio.
First, gold is a traditional hedge against inflation and the U.S. dollar. A combination of massive stimulus spending and excess printing of dollars by the government is ultimately going to lead to inflation and a weak dollar. With the inverse relationship between gold and the dollar, gold is likely to reap the benefits of the inevitable.
Second, the precious metal offers a good method of asset diversification. Gold, as with most other commodities, is uncorrelated to equities and bonds, meaning that gold generally reaps the benefits when traditional equities and bonds are falling. The primary reason behind this lack of correlation is because gold prices aren't driven by the same factors that drive the performance of other assets.
Gold is a nonearning asset whose demand is far more diverse than that of many other assets. Additionally, the demand for gold is driven by discretionary spending from the jewelry sector, investment demand and industrial demand; whereas demand for most commodities is primarily driven by industrial, non-discretionary demand.Lastly, the price of gold isn't at the mercy of government policy. Gold is an asset that cannot easily be issued or produced and is unlikely to witness large decreases in value overnight. Gold offers a hedge against inflation and a weak dollar, it helps investors maximize returns and minimize risks by balancing asset classes of different correlations and it is immune to government policy offering a hedge against poor monetary policy decisions. Some easy ways to gain access to the precious metal include:
- SPDR Gold Shares (GLD), which closed at $112.65 on Thursday
- iShares COMEX Gold Trust (IAU), which closed at $112.72 on Thursday
- PowerShares DB Gold Fund (DGL), which closed at $41.08 on Thursday.
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