Don't Panic! Buy Physical Gold Instead

www.thestreet.com

By John Persinos

Put aside all the arcane quibbling about technical indicators that will supposedly move the price of gold over the coming months. The best approach for your long-term investing strategy is to think of the yellow metal as a permanent fixture in your portfolio. That's especially true right now, with global markets off to a worrying start.

The rule of thumb calls for an allocation of about 10% in either gold mining stocks, ETFs or the physical bullion itself. Below, I explore the compelling reasons for buying bullion, as well as basic guidelines for doing so.

Last year was a tough one for gold, as reflected by the one-year decline of 11.06% of the SPDR Gold Shares ETF (GLD) , which is designed to reflect the performance of the price of gold bullion. Popular gold mining stocks Goldcorp (GG - Get Report) and Newmont Mining (NEM - Get Report)  lost 38.61% and 6.98%, respectively over the past year.

But gold could be poised for a rebound. The price has now steadied at around $1,060 an ounce, and some analysts have been calling for a spike to at least $1,700 by the summer of 2016. So, what accounts for that strength?

The metal maintains its intrinsic value regardless of a government's ability to back its currency. If your country's currency implodes and becomes worthless, you'll still be able to spend your physical gold. The metal is universally accepted around the world, without the need to convert it into currency. It can be bartered anyplace at anytime. And if there's ever an economic crisis and banks freeze individual accounts, a physical gold investment will remain accessible.

Some analysts are predicting a turbulent 2016, perhaps even a market correction. A steep drop in share prices would generally weigh on all stocks, but gold prices react differently to factors, such as geopolitical turmoil or national monetary policies, that can drive down stock prices.

The threat of terrorism and continued central bank tinkering in the U.S., Europe and Asia will make gold more attractive. Gold is a time-tested hedge against inflation; it's also proven protection against crises. During the Great Recession of 2007-09, the worst economic downturn since the 1930s, gold prices rallied from $840 per ounce at the end of 2007 to over $1,200 by the end of 2008, even though inflation over this period stayed in check.

In short, the conditions that are favorable for gold will prove fatal for overvalued stocks that are looking for a trigger to tumble.

China's Thing for Bling

But many analysts are missing a crucial point: Gold prices are also influenced by cultural conditions in China and India. Each country buys more gold than the U.S., Europe, and the Middle East combined.

The pace of China's economic growth may be slowing, but the general population of the Middle Kingdom still has a thing with bling. Individual Chinese are turning to gold not just for ornamental purposes but also as a storehouse of value in uncertain times.

Indeed, China has overtaken India as the world's largest purchaser of physical gold. According to the China Gold Association, the country's demand for the precious metal was projected to surpass supply by at least 550 metric tons in 2015.

The World Gold Council reports that China is at the center of the global "gold ecosystem" and predicts the country's demand for gold will rise by about 20% over the next two years.

Remember, diversification is crucial to any investment strategy. As 2016 comes in with a rocky start, consider re-balancing your portfolio to accommodate the likely economic, business and market uncertainty of the coming year, which will probably be accompanied by rising demand for gold. Hedge your bets accordingly, with physical bullion.