Gold is one of the most sought-after investment vehicles throughout the ages. The reason for the popularity of gold may be different in different periods in history. Even today the rationale behind investing in gold may not be the same for everyone. While some consider it a safe haven, others may think of gold as a hedge against inflation or as an excellent portfolio diversifier or choose it for its easy liquidity.
Viewpoints and justifications may differ but the fact remains that gold dazzles one and all with its mesmerizing brilliance. This article attempts to understand the mystical hold gold has over us and takes a rational look at the reasons for investing in the yellow metal.
Why is gold Important?
Gold has been discovered in graves dating as far back as 4500 BCE – proof that it was valued even before recorded history. During its long chronicle, probably almost as old as mankind itself, gold had been a symbol of power and wealth, used as a currency and in jewelry, and prized for its high liquidity and as a store of value.
Gold, being a noble metal, doesn’t react, rust, corrode, or tarnish, unlike any other metal. It lasts for generations with minimum wear and tear. This permanence of gold must have had a profound impression in the minds of people of the past. As it came to be regarded as a symbol of immortality and power, it became the most coveted possession for the high and mighty.
The rarity of gold in combination with its aesthetic attributes helped elevate the status of gold to the pinnacle. The fact that gold as a metal is perfect for making jewelry and other artifacts helped its case immensely. It soon became the perfect symbol for the ruling class to demonstrate its superiority, status, and authority.
Once gold started being regarded as a status symbol, its place in history was cemented. Whatever the rich and the powerful desired, the masses coveted more. The desire for gold reached a feverish pitch because it was scarce and expensive. Thus began the magical lure of gold that has everyone in its stranglehold even today.
9 Reasons to buy gold today?
In the last few centuries, gold continued its juggernaut unabated. However, its appeal took a different turn. Today, gold is desired more for its potential as a financial asset. It is regarded as insurance in tough times, as a store of value, and more.
Here are the top 9 reasons to invest in gold, the most popular among precious metals.
1. Store of value
Historically the value of fiat currency has depreciated constantly, at some periods crashed too rapidly causing panic and mayhem. Gold has a unique distinction among financial assets to have maintained its value, at times improving it.
This ability of gold to hold its value even in rough weather has made it popular among investors. During economic and political turmoil, when other assets such as stocks and mutual funds are losing their value, gold has proved its worth by shining the brightest.
Gold doesn’t corrode or tarnish. It is malleable, ductile, and a good conductor. Its low melting point makes it easier to work with. Gold absorbs blue light and reflects the rest, resulting in a yellowish glow that we call golden. Together with its property to remain as good as new for centuries, gold is one of the most popular precious metals used to pass on the wealth to the next generation.
Gold mining has been declining since 2000 with few exceptions. The reason is simple – the deposits in the existing mines are near exhausted. Search for more gold has led us to dig deeper and deeper into the earth. This is making the process of gold mining more dangerous and expensive in addition to the severe damage to the environment.
Even as the existing mines are nearing exhaustion, fewer new deposits and mines are being discovered today. On average, it takes five to ten years for a new mine to start production as feasibility studies, approvals, and overcoming the environmental impacts take time. This means, in the coming years, the production of physical gold will continue to plateau.
The limitation in the supply of a commodity is bound to push its prices up. This is one of the grounds attributed to the ever-rising gold prices. And a good enough motive for investing in gold today.
3. Ever-growing demand
The buying power of the consumer in the emerging market economies has been growing rapidly in the past two decades due to strong economic growth. This has led to the surging requirement for the yellow metal in these countries. India and China are the frontrunners in this regard.
The rising disposable income need not necessarily raise the demand for the precious metal. Investors may turn their attention to the most profitable asset to invest their spare wealth. However, in both India and China, gold is an integral part of the culture, thus making them the biggest consumers of the precious metal. The requirement for gold has been steadfast in both countries. This has a cumulative effect on global demand.
A variety of factors has made gold an attractive choice for investors worldwide in the last couple of decades. Investing in gold is becoming more lucrative and secure than many other traditional financial assets. Today, gold is available for investment in myriad forms, from physical gold bullion to the array of paper gold investment choices such as stocks of mines, mutual funds, and ETFs.
As the requirement skyrockets, the gold prices are shooting up, making it more and more attractive as an investment.
4. Inflationary hedge
One of the prime bases for the popularity of gold as an investment is its capacity to act as an inflationary hedge. As the value of fiat currency decreases, the price of commodities including gold increases, leading to inflation.
As the buying power of money decreases, the value of paper assets goes down proportionately. In this scenario, gold has the distinction of retaining its value, making it a hedge against inflation.
Gold has been the favorite asset among investors to ride the aftereffects of inflation since the time paper money was introduced. This is more so in the last fifty years, after abandoning the gold standard completely, during which the price of gold was pegged to the U S Dollar at the constant rate of $35 per ounce.
Together with the perception of gold as a store of value, investing in gold is considered to be highly rewarding.
5. Protection against deflation
Monetary deflation happens when the prices of commodities decrease, economic activities come down, and the economy shrinks. The Great Depression of the 1930s is the worst of the kind the world has endured, but the global recession of 2008 witnessed a similar trend to a lesser extent.
Conventional wisdom tells us that the gold price follows the trend of the rest of the commodities. However, gold is unique in many aspects. Though its nominal price falls along with that of other commodities, its relative purchasing power goes up. The reason for this is not so simple.
During deflation, the natural tendency is to hoard cash. Historically, the safest way to retain cash is in gold. When the economy is going through a bad patch, investors see gold as a safe haven.
In short, any kind of stress in the economy works well for gold as an investment.
6. Weakening U.S. Dollar
The U S Dollar is one of the most prominent reserve currencies in the world and this makes it the default currency for gold trade in the international bullion market. As the value of the US Dollar weakens against other currencies, it drives investors to flock to the safety of gold.
This trend was seen during the 1998-2008 period. During this period, the U.S. Dollar took a tumble for various reasons – runaway inflation, expanding trade deficit, and increase in cash supply being the most prominent. While the U.S. Dollar went through a wringer, the gold price almost tripled.
As the U.S. Dollar weakens, demand for the yellow metal goes up along with its price.
7. Economic turbulence
Gold has proved time and again to be recession-proof, an inflationary hedge, and a safe haven against economic upheavals such as devaluation, depreciation, and a jittery stock market. In fact, when the economy is going through a bad patch, the demand for gold soars due to its reputation as a safe haven. As demand grows, so does the price of gold.
Economic uncertainties lead to declining investor confidence in traditional assets and the automatic response would be to withdraw funds from them. As nervous investors search for a secured place for investing their money pulled out of the stock market, gold stands out as a beacon of hope in dark times.
The reason for the good show by gold in troubled times is hard to explain. Most financial experts attribute this to the long historical connection with gold and its perception as a secure investment. In short, gold is valuable because everyone thinks it is.
8. Political uncertainties
Political happenings around the world have an immense impact on all economies, especially since globalization. Whether it is the hint of a trade war, European debt crisis, or imminent threat of war, geopolitical turmoil in one part of the world is bound to pose threat to economic growth.
Most central banks maintain the interest rate low to increase liquidity in the markets as a way to counter the threat to the economy. And a lower interest rate is manna from heaven for the price of gold. As the interest rates go down, the opportunity cost for gold falls, making it an attractive investment option.
Gold is often referred to as the ‘crisis commodity’ – a commodity investors flock to when there is any sort of crisis anywhere in the world. The high-performance track record of gold in similar situations before has helped in creating this impression in the minds of investors.
9. Portfolio balancer
The main factor to consider for portfolio diversification is selecting assets that have zero or negative correlation with each other. While most paper investments like stocks, bonds, and mutual funds react similarly to stress in the stock market, gold is an exception. The price of gold has always gone up in situations when the value of other investments crashed.
The gold price is driven by multiple factors and the market conditions have only a limited impact on it. The price of gold remains relatively unaffected by the ups and downs in the demand and supply that directly impacts other investments. This unique trait of gold makes it an ideal addition to any portfolio to bring down volatility and risk.
Gold is a dormant asset that brings in profit only when it is sold. This minor disadvantage is offset by its vast array of positive attributes. Investors are more than willing to overlook this minus point to take advantage of its rewards.
The ease of buying gold and its suitability in any portfolio make it a favorite among investors. A consistent high performer, gold is an excellent tool in wealth management.
However, before jumping onto the bandwagon, investors need to fully understand the implications of buying gold. Gold prices tend to be highly volatile in the short term. This means it is profitable mostly as a long term investment. Again, the timing of the purchase and sale has to be perfect to make the most of its profit-making potential.
Through the ages, gold has served as a hedge against the vagaries of the stock market and declining global currencies. The future of gold looks equally bright and promising.