The diversification of gold has an incredible advantage

Gold, other precious metals, and precious stones were the only tangible wealth in the past world. The human civilization of the time was agricultural, which meant that the most productive assets, such as crops and land, were not able to move. Gold and precious stones were the most common alternative to move vast amounts of wealth and remained that for many centuries.

Nowadays, many more forms of wealth are transferable: intellectual property, financial securities, bank deposits, and cryptocurrency. Therefore, the yellow metal is not the only asset to move out of the country.

Gold has plenty of astounding advantages

For starters, gold is an excellent option to store wealth confidentially. If you have physical yellow metal and keep it safe, there's not a 'counterparty' such as an institution or broker standing in between you and the real money.

No one keeps a tab on your gold, and your name isn't even in a database. When you die, your heirs can get the yellow metal with no administrative obstacles.

The yellow metal has proven to be an excellent investment for a long time. Since August 1971, the moment that gold was officially disconnected from the US Dollar, the price of gold has grown 42 times. In comparison, the S&P 500 has increased by 40 times over the same time.

However, this doesn't mean that yellow metal is a better investment. If you reinvested dividends, stocks outperformed. However, the past has shown that yellow metal is an investment worth considering.

Another advantage of yellow metal is it's always been a hedge against risks to the financial system. It's like having an insurance policy. The physical yellow metal has always been a fantastic investment in times of actual financial/economic crisis - Physical gold, coins, and bars.

Many investors put their money into 'paper' gold-related products, such as ETFs (Exchange Traded Funds) - 99.99 percent times Exchange Traded Funds perform similarly to the physical yellow metal. It's 0.01 percent in the actual emergencies when ETFs' performance is significantly diverse from the physical yellow metal.

This was evident at the beginning of the pandemic. In March 2020, significant gold Exchange Traded Funds dropped by about 10 percent in the early months. However, the physical yellow metal and coins shot up dramatically. This means that the physical stuff is always superior to paper.

Then there are many other reasons to own gold, though there's one that stands out: the concept of diversification.

The majority of people know that concept very well. Don't put all your eggs into one basket. We have discussed diversification extensively at Trade Selector, ensuring your lifestyle, assets, and business aren't tied to the same country where you live.

Financial investment diversification is the action of holding multiple assets with low or no correlation to each other.

For a quick illustration, PepsiCo and Coca-Cola are technically two separate businesses. They share similar risks and rewards. Pepsi is likely doing similarly if Coke is doing well, and the reverse is true. So if you hold shares of both Coke and Pepsi, it's investing in the same asset sector. Your rewards and risks are not evenly diversified and disseminated.

Nowadays, many people believe they are diversified since they have put their money into, for instance, a tech company and a bank stock - Amazon and JP Morgan.

Yes, these two companies are certainly less correlated than Pepsi and Coca-Cola. However, you are still investing in stocks. This is not very good diversification.

This is where gold can shine. Compared to the market for stocks, i.e., the S&P 500, gold has a debased correlation. When yellow metal is doing well, the stock market is performing poorly, and there are occurrences where stocks are rising, and gold is falling. There are also years when they both perform well and when they both are declining in tandem.

In a mathematical sense, the yellow metal can be described as a way to diversify away from the paper market. Their rewards and risks are entirely different. Surprisingly, however, yellow metal's diversification does not stop there.

Let's examine the history of the price of yellow metal (a reference to a beginning in 1971). In that case, the price history also shows a low correlation to the American economy, i.e., there are times when the US economy shrinks, but gold prices rise. There are also times when the US economy expands; however, gold prices trade sideways.

There is even a minimal correlation between Federal Reserve and yellow metal, i.e., the price of yellow metal fluctuates independently of the fact that interest rates increase or fall, whether the Federal Reserve balance sheet expands or collapses, or if the Federal Reserve raises the amount of money supply.

This diversification is an appealing benefit of gold, particularly in these dangerous geopolitical and volatile economic times. You may also be taken aback that silver can be a significant divergence asset from gold - However, this is a topic for another article. 

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