Gold prices took a tumble in February after investors pulled almost $2 billion from bullion-backed exchange-traded funds, new research shows.
Still, the recent tension in the banking system has helped steady the market for the yellow metal.
Investors dumped a staggering 34 metric tons of the metal from their ETF holdings in February worth $1.7 billion dollars, according to a recent report from industry group World Gold Council.
The largest gold-backed ETF is the SPDR Gold Shares (GLD
GLD
That sent prices down by more than 5%. At the beginning of last month a toy ounce of the metal would fetch $1,950, but that had fallen to $1,837 by March 1, according to data from TradingEconomics.
While that wasn’t great for bullion investors, it is what happened next that shows why its generally worth holding at least some gold within a wider diversified portfolio.
In early March the Silicon Valley Bank failed as depositors withdrew their cash i a search for better investment yields. The mini-crisis or perhaps just tension spread through the banking system. In turn that helped push the price of gold back up to $1,968 recently as investors fled to the safe haven-asset.
Typically, the price of gold is uncorrelated with other major assets such as stocks or bonds. That means when stocks drop then gold prices may go up or down or not move at all.
That lower correlation makes portfolios that include a portion of gold bullion a lot less volatile, meaning the swings in overall value of the combined assets is lower than it would have been. On Wall Street lower volatility is synonymous with lower risk.
Professional investors have widely different ideas of how much gold is enough to help reduce volatility. These vary anywhere between 7% of total portfolio up to as much as 30%. Probably somewhere in between, around 15% would suffice for many investors.
The downside with gold is that there are no dividends or interest payments. Plus investors pay for storage and insurance. However, over many decades investors have found it a useful safe-haven asset in times of economic tumult.
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