What Is Gold's Role?

Gold's role as disaster insurance in a time of easy money.

Michael Rawson, CFA 15.02.2013
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At a joint meeting of the International Monetary Fund and World Bank held in Tokyo in October, Federal Reserve chairman Ben Bernanke said that central bankers in emerging economies should "refrain from intervening in foreign-exchange markets, thereby allowing the currency to rise." Of course, for one currency to rise, another must fall. It can be argued that the Fed chairman was suggesting that the U.S. dollar is overvalued and could be due for a decline.

Elsewhere Bernanke has emphasized on several occasions that monetary policy, controlled by the central bank, is doing all it can to spur the economy and that fiscal policy, the purview of the government, needs to be more aggressive. In recent decades, monetary policy has been run independently of fiscal policy. That said, many claim that the Fed has become increasingly politicized, and some politicians have gone so far as to suggest that Ben Bernanke be fired or that the government should strip control of monetary policy from the Fed and return to the gold standard.

Meanwhile, though the Fed’s policies of quantitative easing are potentially inflationary, inflation has been benign to date. But many investors, fearful of equities since the financial crisis and spooked by the specter of inflation in an era of "QEternity," have increasingly considered gold for their portfolios. Gold has historically proved to be an effective inflation hedge, and a declining dollar is positive for bullion prices. But just what role should gold play in a traditional stock and bond portfolio? In this article, we will examine where gold might fit in your portfolio and highlight our favorite exchange-traded funds that offer exposure to the yellow metal.

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About Author

Michael Rawson, CFA  Michael Rawson, CFA is an ETF Analyst with Morningstar.

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