It is a well-known fact that investors can hold gold in their portfolio by buying the physical product, gold miners’ stocks, or through ETFs (Exchange Traded Funds).
Some people argue that the precious metal is simply a relic that does not hold any monetary qualities. This is because, in today’s economy, people value paper currency more.
They also argue that its major advantage is its use in the jewelry industry. However, others assert that it is a valuable commodity with intrinsic features that make it stand out as unique.
This explains why many investors find it necessary to add it to their portfolios. You can click here to find out how to invest in precious metals.
History of Gold
We need to look back at how the market for this precious metal started so as to fully appreciate its essence. The history started when the Egyptians began forming jewelry in 2000 BC. However, its use as currency began in 560 BC when merchants wanted standard money for easy transfer while trading.
Gold coins, stamped with recognizable seals, were the solution because every nation recognized and accepted gold jewelry. Subsequently, the importance of the metal grew and in 775, Great Britain developed its currency which was also metals-based.
The pence, shillings, and British pound represented an amount of silver or gold. Eventually, throughout America, Africa, Asia, and Europe, it stood as a symbol of wealth.
The Position of Gold in Contemporary Economy
Although gold is no longer the basis of most worldwide currencies like the USD, it still holds importance in contemporary times.
When you take a close look at the balance sheet of some financial organizations like the IMF and central banks, you will understand its importance around the globe. These organizations hold almost a fifth part of the above-ground world’s supply of the precious metal.
Some central banks have also added gold to their current reserves. They are concerned about how the global economy will fare in the long run. This should tell us that there is something valuable about the metal. Below are some of its uses in the contemporary economy:
A Reasonable Hedge
In an economy where inflation is on the rise and the US dollar is declining, investors are turning to gold. History shows that the metal serves as a hedge in both cases. During inflation, it appreciates because the moment investors realize that they are making losses, they reposition their investments. They prefer to channel it to something that has traditionally retained its value.
Globally, the price of gold is in dollars and that’s why it keeps benefiting when the dollar declines. The relationship between the metal and the dollar can be explained in two ways. First, investors must sell dollars to buy it. Ultimately, this reduces the value of the dollar as many investors want to diversify.
Second, a weak dollar is a platform for more investors who have other currencies to be able to buy gold. This means that when the dollar grows weaker, some currencies gain value. Therefore, holders of such currencies will make more demand for the metal, that they would otherwise be unable to afford, all things being equal. Get to know more about forex hedging.
In modern times, the metal is important because it has preserved wealth successfully from generation to generation. We cannot say the same about paper currencies. To make things clearer, let’s consider this example:
Around 1970, an ounce of gold was about $35. If you decided to keep any of them, you would be able to buy the same item with both, like a fancy bike or a new suit. Fast forward to modern times; if you have an ounce of gold now and convert it to the current price, it can still get you a new suit or a fancy bike. But can we say the same about a $35 note?
So you can see that if you held on to that $35 in 1970, you won’t have a reasonable amount of wealth today compared to keeping the precious metal. That is because inflation has eroded the dollar’s value while that of the precious metal keeps increasing.
A Haven for Investors
With the rise in economic and political uncertainty in different countries of the world, investors choose the metal as a haven. In historical times, there were cases of collapsing currencies, collapsing empires, and political coups. People succeeded in securing their wealth by holding gold.
They even used it to trade for security, to escape the turmoil of the era. Consequently, in contemporary society, investors lean on the same precious metal when events hint at a global economic meltdown.
A Diversifying Instrument
Whether you’re concerned about securing your wealth, inflation, or a weakening US dollar, gold serves as a diversifier. It does not have any correlation to real estate, stocks, and bonds.
Therefore, you can use it to diversify your portfolio. You may want to read about the Oxford Gold Group scam before choosing a precious metal investment company.
An Asset That Pays Dividend
Typically, growth investors find the metal more appealing than income investors. This is because when the metal experiences an increase in price, the stocks will also rise and vice versa. However, mining companies try to manage the stocks such that they remain profitable irrespective of the rise or fall.
You can know when the metal’s price has appreciated by looking at the stock prices. Any small increment in the metal’s price leads to significant profits in stocks. Also, owners of those stocks will enjoy higher ROI (return on investment) than physical gold owners.
All investments have pros and cons. If you do not want to hold physical gold, you may choose to buy shares in mining companies. Also, if you believe that the metal offers safety against inflation, you can invest in jewelry, coins, or bullion.
Whichever option you choose, note that you are making a worthy investment for yourself and generations yet unborn.
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Author: Matt Ledesma