Gold is revered worldwide for its monetary worth and illustrious history, which has been entwined with cultures for millennia. Coins containing gold debuted circa 650 B.C., and the first pure gold coins were minted during the reign of King Croesus of Lydia some 100 years later.
People have persisted in hoarding gold for numerous reasons over the years. Societies and now economies have assigned value to gold, sustaining its worth. It is the metal we use when other kinds of currency fail, and thus, it always has value as an insurance policy against hard times. Here are eight practical reasons to consider purchasing gold now.
Table of Contents
- Gold has been considered a rare and valuable commodity throughout history.
- Gold is a hedge against inflation and deflation and a portfolio diversifier in the present day.
- Gold, being a worldwide store of value, may also provide financial protection against geopolitical and economic instability.
A History of Maintaining Its Worth
In contrast to paper currency, coins, and other assets, gold has retained its worth over time. People view gold as a method to preserve and pass on their wealth to future generations. People have revered the unique features of precious metal since ancient times. Gold does not corrode and can be melted over a standard flame, making it easy to manipulate and coin. In addition, unlike other elements, gold has a distinct and attractive hue. Einstein’s theory of relativity was required to explain the phenomenon of light absorption by gold’s heavier atoms and faster-moving electrons, which required Einstein’s theory of relativity to explain.
Weakness of the U.S. Dollar
Although the U.S. dollar is one of the world’s most significant reserve currencies, when the dollar’s value declines relative to other currencies, as it did from 1998 to 2008, consumers typically seek the safety of gold, causing gold prices to rise. From 1998 to 2008, gold prices roughly quadrupled, reaching $1,000 per ounce in early 2008 and nearly tripling between 2008 and 2012, surpassing $2,000 per ounce. Various factors contributed to the depreciation of the U.S. dollar, including the country’s enormous budget and trade deficits and substantial growth in the money supply.
Historically, gold has been an excellent hedge against inflation, as its price tends to increase when the cost of living rises. Throughout the past 50 years, investors have witnessed gold prices surged and the stock market fall amid periods of rising inflation. When fiat money loses buying power due to inflation, gold tends to be valued in those currency units and grows with other assets. In addition, gold is viewed as an excellent store of value. Thus individuals may be urged to purchase gold when they perceive their local currency is depreciating.
Deflation is described as a period of falling prices, which has not occurred internationally since the Great Depression of the 1930s (although a small degree of deflation happened following the 2008 financial crisis in some parts of the world). During the Great Depression, gold’s relative buying power increased as other prices plummeted. People decided to hoard cash, and the safest way to store currency at the time was in gold and gold coins.
Uncertainty in World Politics
Gold sustains its worth not just during financial instability but also during geopolitical uncertainty. It is sometimes referred to as the “crisis commodity” because people run to its relative safety when global tensions mount; at such times, it frequently outperforms other assets. As a result of the European Union’s crisis, gold prices have suffered significant price fluctuations this year. When trust in governments is low, its price frequently climbs the highest.
Since the 1990s, most of the gold supply on the market has originated from sales of gold bullion from the vaults of global central banks. In 2008, this selling by international central banks decreased significantly. In addition, the output of new gold from mines has reduced since 2000. According to BullionVault.com, yearly gold mining production fell from 2,573 metric tons in 2000 to 2,443 metric tons in 2007. (According to the United States Geological Survey, gold production increased to over 2,700 metric tons.) It might take five and ten years to put a new mine into operation. In general, a decrease in the gold supply causes gold prices.
In prior years, the rising prosperity of developing market countries enhanced the demand for gold. Gold is an integral part of the culture in many of these nations. In China, where gold bars are a common form of savings, the demand for gold has remained consistent. India is the second-largest consumer of gold globally; it is used for a variety of purposes, including jewelry. Thus, the Indian wedding season in October is generally when worldwide demand for gold is the strongest.
Investor demand for gold has also increased. Many are beginning to view commodities, especially gold, as an asset class to allocate capital. SPDR Gold Trust is one of the largest ETFs in the United States and the largest holder of gold bullion globally as of 2019.
Finding investments that are not tightly associated is the key to diversification; historically, gold has had a negative correlation with equities and other financial instruments. Recent events confirm this:
- The 1970s were prosperous for gold but disastrous for stocks.
- The decades of the 1980s and 1990s were successful for equities but disastrous for gold.
- 2008 witnessed a significant decline in stocks as customers flocked to gold.
- Investors with a diversified portfolio use gold with equities and bonds to lessen overall volatility and risk.
Gold should be a significant component of a diversified investment portfolio because its price rises in reaction to events that cause paper investments, such as stocks and bonds, to lose value. Although gold’s price is subject to short-term volatility, it has always maintained its worth over the long run. It has functioned as a buffer against inflation and the degradation of major currencies throughout the years, making it a worthwhile investment.