Another Reason to Consider Gold: Liquidity

The World Gold Council’s latest edition of Gold Investor highlights one of gold’s many attractive aspects: its liquidity. Liquidity refers to “How easy it is to buy or sell a specific product or type of metal.” For example, a one-ounce American Gold Eagle coin is very liquid due to a very active, reliable, ready population of buyers and sellers almost always being present. Gold, in general, is known to be a very liquid asset. 

In a section within the edition titled “The most liquid of all ‘liquid alts’ , the WGC discusses alternative assets, which they define as “anything that is not a stock, bond or money market instrument.” Examples include hedge funds, private equity, real estate, and commodities. They currently account for 5% of global assets, while gold accounts for 1%. They have grown in popularity over the past decade, however, the 2008-9 financial crisis forced many investors to reconsider these types of assets due to their typical illiquidity.

As a response, investors are becoming more interested in assets that are more liquid, publicly-offered, transparent, and have lower fees. They are also seeking more diversification of their portfolios. Alternative assets fitting this description are now being referred to as “liquid alts”. Since the financial crisis, there has been a huge surge in demand for liquid alts. A study by Citigroup estimates that global demand for them could reach $1.3 trillion by 2017.

Gold certainly fits in the category of liquid alts. It is an alternative to traditional investments such as stocks and bonds, highly liquid, and transparent. It is treated by some as a commodity, but actually behaves more like a currency and a hedge. However, during market crises when diversification matters the most, most alternative assets become more correlated with the stock market than they were before, and this can be shown with data (see chart below). Gold, on the other hand, does not do this and is actually the sole exception. Assets such as hedge funds, private equity, real estate, and commodity-based investments became more correlated with the stock market in 2008 and have not dropped to pre-financial crisis correlation levels. Gold, which typically has a low correlation with the stock market under normal market conditions, is the only liquid alt whose stock market correlation has dropped since the crisis.

stockmarketcorrelation
Gold is one of the most liquid assets for these reasons:

  • Average daily volumes of gold traded are very high
  • Both big and small investors can participate in the gold market, starting at just individual bars and coins
  • Gold prices can be accessed 24/7

In addition, what makes gold different from other liquid alts is the large global market capacity, a low cost for implementing the investment (i.e. storing it), and a long, proven track record. The WGC writes that “There are no concerns around limited track records for gold. The benefits of adding gold to an investment portfolio have been studied and reported extensively, and gold has been freely traded since the 1970s.”

Aside from liquidity, gold is also rare, useful in industry, a hedge against inflation, a store of wealth, and always has intrinsic value. Paper assets hardly ever possess all of these characteristics. To take advantage of these unique properties of gold and use them to protect a very important asset: your retirement funds, consider opening a Gold IRA – an individual retirement account that can hold physical gold and other precious metals. Call American Bullion today at 1-800-326-9598 to speak with a specialist.