Gold holds a special place across cultures, cherished for its value and storied past spanning millennia. The tradition of using gold coins traces back to around 550 B.C., under the rule of King Croesus of Lydia.
Over time, this precious metal has maintained its allure for diverse reasons. From ancient societies to modern economies, gold remains highly esteemed, ensuring its enduring significance. It serves as a reliable fallback when conventional currencies falter, offering a form of financial security during uncertain times.
Here are eight down-to-earth reasons to consider having some gold in your possession.
- Gold has always been regarded as something precious and significant.
- Nowadays, having gold can help protect your wealth from both inflation and deflation.
- It’s also a smart move to diversify your investment portfolio. Plus, being a universally accepted form of value, gold can offer a safety net during uncertain times, whether it’s due to global politics or big economic shifts.
A History of Holding Its Value
Unlike paper currency, coins, or other assets, gold has held onto its value over the centuries. People see gold as a means to pass down and safeguard their wealth for future generations. Since ancient times, folks have treasured the distinct qualities of this precious metal.
Gold doesn’t rust and can be melted with a simple flame, making it convenient to shape into coins. Plus, it boasts a stunning and unparalleled color, unlike any other element. Gold’s atoms are heavier, and its electrons move quicker, resulting in the absorption of certain light wavelengths—a phenomenon that Einstein’s theory of relativity helped explain.
Weakness of the U.S. Dollar
Even though the U.S. dollar holds a prominent position as one of the world’s key reserve currencies, its value sometimes takes a hit against other currencies—as it did between 1998 and 2008. During such times, people often turn to the stability of gold, causing its prices to soar.
From 1998 to 2008, the price of gold nearly tripled, hitting the $1,000-an-ounce milestone in early 2008, and nearly doubling again from 2008 to 2012, surpassing the $2,000 mark.
The drop in the U.S. dollar stemmed from various factors, including the nation’s significant budget and trade deficits, along with a substantial increase in the money supply.
Inflation Hedge
Gold has always been a reliable defense against inflation, as its value typically climbs when the cost of living goes up. In the last half-century, investors have witnessed gold prices skyrocket while the stock market takes a dive during periods of high inflation.
This occurs because when fiat currency loses its buying power due to inflation, gold tends to be valued in those currency units, causing it to rise in tandem with everything else. Additionally, gold is viewed as a safe haven for preserving wealth, prompting individuals to invest in it when they suspect their local currency is depreciating.
Deflation Protection
Deflation is when prices drop, businesses slow down, and the economy struggles with too much debt. We haven’t experienced this on a global scale since the Great Depression of the 1930s, although there was a bit of deflation in certain parts of the world after the 2008 financial crisis. Back in the Depression, gold’s purchasing power shot up while everything else got cheaper.
That’s because folks were keen on holding onto cash, and gold and gold coins were seen as the safest way to stash cash back then.
Geopolitical Uncertainty
Gold holds onto its value not just during financial uncertainty, but also when geopolitical tensions are high. It’s often dubbed the “crisis commodity” because folks seek its relative safety when global tensions escalate. In these moments, gold tends to outshine other investments, with its price often spiking when trust in governments is at a low ebb.
Supply Constraints
A significant portion of the gold supply in the market since the 1990s has come from the sale of gold bullion held by global central banks. However, these sales slowed down considerably in 2008. Meanwhile, the production of new gold from mines has been decreasing since 2000.
According to BullionVault, the annual output of gold from mining dropped from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. However, in the years following, gold production saw a decade of growth, reaching its peak at 3,300 metric tons in both 2018 and 2019, and then surging to 3,644 metric tons in 2023.
The recent decline in production hints at potential renewed pressure on global gold supplies. Bringing a new mine into production typically takes five to ten years.
As a general rule, a reduction in the supply of gold tends to drive up gold prices.
Increasing Demand
In recent years, the growing prosperity of emerging market economies has driven up the demand for gold. In many of these nations, gold holds deep cultural significance. Take China, for example, where gold bars are a cherished traditional way of saving; the demand for gold there remains strong. India follows closely as the second-largest consumer of gold globally, with its diverse uses including ornate jewelry. This is especially evident during the Indian wedding season in October, which traditionally marks the peak in global gold demand.
Additionally, investors have increasingly turned to gold as a viable investment option. Many now view commodities, especially gold, as an essential asset class for their investment portfolios. In fact, the SPDR Gold Trust (GLD) has emerged as one of the largest and most actively traded exchange-traded funds (ETFs) in the United States.
Portfolio Diversification
The key to diversifying your investments is to choose assets that don’t move in sync with each other. Gold has a long history of moving in the opposite direction of stocks and other financial instruments. Recent trends confirm this:
- In the late 1970s, gold performed well while stocks struggled.
- Both the 1970s and 1980s saw gold shining while stocks floundered.
- Conversely, the late 1990s and mid-2000s were golden years for stocks but tough times for gold.
Smart investors who want to spread their risk mix gold with stocks and bonds in their portfolios. This blend helps to smooth out overall volatility and minimize risk.
Why Should I Invest in Gold?
There are plenty of good reasons to think about adding gold to your investment mix. This precious metal has a track record of holding its value, which makes it a handy tool for safeguarding against inflation.
When the U.S. dollar isn’t doing so hot or when things get shaky on the economic and political front, gold prices usually rise. Plus, having gold in your portfolio can help spread out risk, as its price tends to move in the opposite direction of other types of investments.
What Determines the Price of Gold?
Gold prices might swing quite a bit in the short run, but over the long haul, this metal has shown its staying power. Typically, what drives gold prices is a mix of how much is available, how much people want it, and how investors are feeling.
Since gold is often turned to as a shield against inflation, the rate at which prices rise—and what folks expect them to do in the future—can influence how much gold goes for. Also, if the economy starts to hit the skids, gold prices might climb because it’s seen as a pretty secure bet when times get tough.
How Can I Invest in Gold?
There are various ways to get into investing in gold. You could go for the real deal and own physical gold, like bullion, coins, or jewelry, but keep in mind that storing and insuring these assets can be pricey. Alternatively, you could look into investing in a gold exchange-traded fund (ETF) or buying shares in mining companies that dig up and produce this precious metal.
The Bottom Line
Gold should be a key component of a well-diversified investment portfolio because its price tends to rise when events cause the value of paper investments, like stocks and bonds, to drop. While the price of gold can be up and down in the short run, it has consistently held its value over the long haul. Throughout time, gold has acted as a hedge against inflation and the weakening of major currencies, making it a worthwhile investment to think about.
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