The Two Biggest Misconceptions About Gold

Just For Thinking

Read? Why must be Gold for hedging Inflation???

By Alex Rosenberg

Gold is one of the most widely held financial assets - but that doesn't mean everyone understands the catalysts that drive gold higher or lower. On Tuesday's "Futures Now," RBC Precious Metals Strategist George Gero set out to clear two of the biggest misconceptions people have about gold.

Misconception One: If Gold Falls for a While, That Gives You a Good Chance to Buy It

 
Gold bars at South Africa's Rand Refinery. REUTERS/Siphiwe Sibeko
This one sounds pretty obvious. Gold is worth a given amount, so if people keep selling it, than it will fall to a level at which it's a good value - right?

Well, not exactly. As Gero explains, "Asset managers look for performance - and performance has not been with gold." This explains why the major stock market rally has presented a serious headwind for gold. As stocks have seriously outperformed bullion, managers moved their money out of bullion and into what was working.

That's why trends in the gold market can be far more important than any sense of inherent value - meaning that, paradoxically, falling gold prices are bad news for people who are looking to buy in.

Misconception Two: Gold Is a Safe Haven That People Should Buy When They're Worried About the Market.

Okay, so if stocks and gold often move in opposite directions, then you should buy gold if you think the market will drop, right?

Sorry, wrong again. Gold, Gero explains, "is a misunderstood safe haven trade. Because the real safe haven for gold has been maintenance of purchasing power."

In other words, people might scramble to buy gold when they become fearful of inflation, because gold stores value in a way that dollars don't. But gold isn't necessarily a "safe haven" in the way that treasury bills or U.S. dollars are. It protects only against inflation - and not against a market downturn. And for that reason, Gero said, "Gold is not meant to be a buffer against stock market moves."

So now that we've got those cleared up - what should the average investor do with gold?

George Gero says retail investors should look to keep about 5% of their portfolio in gold. Since holding bullion will not protect you against a major downward move in stocks, Gero explains, you should just keep enough around to hedge yourself against inflation.