Gold has remained one of the most in-demand precious metals for hundreds of years.
Valued for its scarcity, and used for everything from jewelry to computer products, savvy investors all over the world are increasingly looking to gold as a safe bet for their investment portfolios.
With the rise of gold-backed cryptocurrencies and increasing calls for the return of the Gold Standard, investing in gold has never been more popular.
What Is The Gold Standard?
A country that operates under the gold standard has the value of its paper currency directly linked to gold. For many years, this is how the majority of countries measured their currencies. Under the gold standard, economies remained relatively stable, with minimal inflation.
The Gold Standard system started to falter during World Wars I and II, with governments overspending on their war efforts. The Gold Standard was completely abandoned in 1971 when US President Nixon announced a temporary break between the value of gold and currency. This temporary break was never reversed and as a result, all major global currencies converted to ‘fiat’ currencies.
Fiat currencies have a value that is tied only to each other, without the traditional link to the value of gold, although some economists still argue that the Gold Standard is the only genuine way to measure money’s worth.
There are rising calls from gold-backed cryptocurrency enthusiasts to return to using the gold standard for US currency, so is this something you should know about? Why are so many people investing in gold?
1. Global Political Uncertainty
It may feel that every year, global instability is growing.
Between climate change, rising tensions between political superpowers, and the continuing effects of the Covid-19 pandemic on the worldwide economy and personal freedoms, the geopolitical climate seems as unstable as ever.
In times of uncertainty, investors often look to gold as a safe bet, in case economies and their fiat currencies crash.
Gold prices experience major growth during times of low government confidence or strained global relationships, to the point where gold is sometimes referred to as the ‘crisis commodity’.
2. Portfolio Diversification
While some invest in gold during times of uncertainty, other investors take a more balanced approach.
Portfolio diversification is one of the more commons reasons investors might look to gold as a valuable addition to their more traditional portfolio.
Sinking money into an assorted collection of options ensures that the investor does not have all their eggs in one basket, putting them in a more confident position during times of market volatility.
Having funds tied up in the real estate, stocks and gold is a smart option that allows an investor to minimize the risk when one part of their three-pronged investment strategy is underperforming.
Gold has historically increased in value when stocks are performing badly. By diversifying their portfolio, individuals can use gold as a form of insurance, as it’s likely the value of their gold assets will reduce the impact any stock crashes have on their personal net worth.
3. Protection Against Inflation
With fiat money being standardized across modern governments, investors may be concerned about unexpected inflation rendering their life savings worthless.
Gold has the benefit of being a physical asset that is in limited supply, meaning it is much more unlikely that gold could lose its value in the way that a failing currency is prone to during times of distress. Gold is not digital, is not reliant on electronic banking or stock systems running correctly, and cannot be wiped out accidentally by banking errors or even bank closures.
Historically, when costs of living rise rapidly, so does the price of gold. Having some gold-based investments is good insurance against standard currency losing its value.
4. Supply and Demand
Gold is a finite product.
A large amount of the gold available on the market in the last couple of decades has been sourced from central banks selling gold bullion from their vaults.
As the availability of bullion from banks decreases, the production from gold mines has been in steady decline since the start of the new millennium. Essentially, gold is becoming less available, and we are exhausting the stores of gold available to be mined from the earth.
Simultaneously, gold is in increasing demand for the production of computers and electronics, due to its properties as an electrical conductor which is also more malleable than copper.
In addition, gold is in continual demand for jewelry and homewares, particularly in nations such as India where gold is a staple of elaborate cultural wedding celebrations.
In short, the global supply of gold is dwindling, while demand shows no sign of slowing down. There are fewer safer investments than a precious metal which is becoming increasingly rare.
How to Buy Gold
If you’re convinced that gold is a smart investment option for you, you might be wondering how you actually get your hands on some, after all, gold bars aren’t exactly widely advertised for sale.
Physical bullion (gold bars or coins) is the traditional way of trading, popular with investors who value having their gold close by and immediately accessible. As it’s a physical product, bullion can be transported and stored just about anywhere you’d like.
One major drawback to bullion is security. If someone takes your gold, you have little recourse available to you unless the thief can be tracked down before they sell or trade it. A reliable safe is a good option in securing your investment, and bank storage vaults are another avenue to explore, although this can negate the accessibility aspect of bullion that some investors enjoy.
If you’d like to invest in gold without the stress of providing security for bullion, exchange-traded funds (EFTs) are the simplest way to invest. An EFT fund owns an amount of gold, and issues units to investors based on how much the gold is currently worth. The more investors buy into the EFT, the more gold the fund purchases. EFTs are similar to stock trading and may feel more comfortable for a first-time gold investor.
It is also possible to invest in gold indirectly, by buying shares in a gold mining company. A company that owns a gold mine also owns the gold stored within the mine. This stored gold, along with the current price of gold, affects the share price of the company.
The Bottom Line
There are many valid options to invest in gold, and many would argue it is a necessary insurance policy against economic uncertainty.
Making gold part of your regular investment portfolio can give you peace of mind in knowing your financial future is a little safer from economic volatility.