Gold has a history that crosses countless borders and thousands of years. For these reasons and others, it’s respected globally. The first coins that contained gold date back to approximately 650 B.C. Around a century later, during King Croesus of Lydia’s reign, pure gold coins were made for the first time.
While many currencies of the past have faded away, gold is something that people continue to hold onto. Gold continues to be valued by modern economies, which is why it has held its worth. Gold is often treated as a form of financial insurance. This metal can be used in place of other currencies.
Here are eight reasons to consider including gold in your investment portfolio.
What to Keep In Mind:
* Gold has been valued for centuries across many different cultures
* Gold can diversify a portfolio and protect against inflation and deflation
* Since gold is valued worldwide, it can be used to protect finances during times of instability or uncertainty
Gold Continues to Hold Its Value
The value of coins and paper currency has fluctuated wildly over time. Gold, however, has continued to be valuable. For many, gold is perceived as the best way to preserve wealth between generations. Even before gold coins were produced, ancient people valued this precious metal for its many unusual properties.
While gold can be melted won over a flame, it won’t corrode over time. This makes it ideal for use as a coin. The color of gold is also very distinctive. Gold has heavier atoms and faster-moving electrons, which allows it to absorb some light.
This was something that was not discovered until Einstein’s theory of relativity.
It’s a Way to Diversity a Portfolio
To create a diverse portfolio, it’s necessary to seek out investments that are not closely linked. Gold is ideal for this. Across history, its correlation to financial instruments like stocks has been negative. This has also held in recent histories:
* Gold thrived in the 70s, while the stock market struggled.
* Stocks surged throughout the 80s and 90s, but gold did poorly.
* In 2008, many consumers moved their money to gold, which contributed to a decline in the stock market.
When a portfolio includes stocks, bonds, and gold investments, the portfolio will be far less volatile, which means the risk to the investor will be much smaller.
The U.S. Dollar Isn’t Always Strong
The U.S. dollar is considered to be a vital reserve currency, but during some periods, the dollar becomes weak against other currencies. For example, many people invested in gold between 1998 and 2008, which lead to an increase in the value of gold. During this decade, gold prices nearly tripled.
Near the start of 2008, gold was valued at $1,000-an-ounce. Values continued to rise and nearly doubled between 2008 and 2012 when they rose above $2,000 an ounce. Several factors contributed to the decline in the value of the dollar, such as trade deficits, the United States’ substantial budget, and a rise in the money supply.
It Can Serve As A Hedge Against Inflation
When the cost of living rises, the price of gold typically increases. This is one of the reasons it has a long history of being used as an inflation hedge. The stock market has plummeted across the last 50 years when inflation has risen, but gold prices have gone up.
Why does this happen?
Inflation directly impacts the purchasing power of a currency. Since the pricing of gold is related to these units of currency, its value continues to rise. Gold also tends to hold its value over time. This has caused many people to invest in gold when they believe that the value of their local currency is on the decline.
It Can Protect Against Deflation
When the activity of businesses slows, prices decrease, and the economy is brought down by extensive debt, it is described as deflation. This has not occurred on a global level since the 1930s when the Great Depression took place.
However, there was some deflation in parts of the world after the financial crisis in 2008. The purchasing power of gold skyrocketed during the Depression, even as other prices were plummeting. People opted to hold onto cash during this uncertain time, and it was far safer to keep assets in gold.
Gold doesn’t just hold its value in periods of financial instability. It also remains stable during times of geopolitical instability. Because of this, it’s common to see gold described as a “crisis commodity.” It’s considered to be safe even during times of worldwide tension.
An example of this is the crisis involving the European Union. The uncertainty surrounding the union lead to price increases for gold. A lack of confidence in governments can have a positive impact on gold’s value.
Constraints on Supply
From the 1990s onward, the majority of gold available on the market has come from global central banks, which have provided gold bullion from their vaults. In 2008, the selling of bullion saw a significant decrease. Furthermore, gold mining has been on the decline since 2000.
Data from the BullionVault website shows that yearly output from goldmines was at 2,573 metric tons in 2000 and fell to 2,444 metric tons by 2007. Data from the U.S. Geological Survey does say that gold production increased in 2011, hitting an output of almost 2,700 metric tons.
Still, because bringing a new mine into production can take as long as a decade, the gold supply is always limited. When the supply of gold is reduced, gold prices typically rise.
The Demand for Gold Is Rising
The demand for gold has increased globally because of an increase in wealth from emerging markets. In these economies, gold often has a significant cultural role. An excellent example of this is in China, where it is tradition to use gold bars to save.
Gold demand has remained steady in this region. In India, gold is used in many ways, including the production of jewelry. India is the second-largest consumer of gold globally. The demand for gold tends to be particularly high in India’s wedding season, which takes place in October.
Investors are also more interested in putting money into gold. Commodities like gold are being seen as an increasingly important investment class. To back this up, in 2019, SPDR Gold Trust became the largest holder of gold bullion in the world. It is also one of the United States’ largest ETFs.
What to Remember
The value of gold tends to increase at the same time that the value of other investments, like stocks and bonds, decreases. Because of this, it belongs in all properly diversified portfolios. Even though gold has shown some short-term fluctuations, its value has remained stable over time.
Across history, it has served as an inflation hedge and as a means of protection when other currencies have eroded in value. For these reasons and others, you should strongly consider investing in gold.