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) - Get Report, which closed at $112.65 on Thursday
- iShares COMEX Gold Trust (IAU) - Get Report, which closed at $112.72 on Thursday
- PowerShares DB Gold Fund (DGL) - Get Report, which closed at $41.08 on Thursday.
When investing in gold, it is equally important to keep in mind that it is a commodity and subject to the volatility and inherent risks that are involved with investing in commodities. To help protect against these risks, an exit strategy which identifies a price point at which an upward trend in these equities could come to an end is of utmost importance.
According to the latest data at
, an upward trend in the mentioned gold exchange-traded funds could come to an end at the following price points: GLD at $108.45, IAU at $108.69, DGL at $39.65.
Written by Kevin Grewal in Laguna Niguel, Calif.
At the time of publication, Grewal had no positions in the securities mentioned.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.