Gold is world-renowned for its value and long history, and has been intertwined with culture for thousands of years. The gold coin appeared around 650 BC, and about 100 years later, the first pure gold coin was minted in the reins of the Lydian king Croesus.
For centuries, people have continued to hold gold for various reasons. Both society and the current economy endow gold with value so that its value will last forever. When other forms of currency do not work, it is the metal we rely on, which means that it always has a certain value and can be used as insurance against difficult times. Here are eight practical reasons to consider holding some gold today.
- Throughout history, gold has always been regarded as a special and valuable commodity.
- Today, holding gold can be used as a tool to hedge against inflation and deflation, and it is also a good tool for portfolio diversification.
- As a means of storing global value, gold can also provide financial protection under geopolitical and macroeconomic uncertainties.
The history of keeping its value
Unlike paper money, coins or other assets, gold has maintained its value since ancient times. People view gold as a way to pass on and preserve wealth from generation to generation. Since ancient times, people have valued the unique properties of precious metals. Gold does not corrode and can be melted on ordinary flames, making it easy to process and use as coin stamps. In addition, unlike other elements, gold has a unique and beautiful color. Atoms in gold are heavier and electrons move faster, thus absorbing some light; a process that is solved using Einstein’s theory of relativity.
Although the U.S. dollar is one of the most important reserve currencies in the world, when the U.S. dollar depreciates against other currencies, as it did from 1998 to 2008, this tends to encourage people to flock to safe gold, thereby pushing up the price of gold. Between 1998 and 2008, the price of gold almost tripled, reaching the milestone of US$1,000 per ounce in early 2008, and almost doubled between 2008 and 2012, breaking the US$2,000 mark.There are many reasons for the depreciation of the U.S. dollar, including the country’s huge budget and trade deficit, as well as a substantial increase in the money supply.
Gold has always been an excellent tool to fight inflation, because when the cost of living increases, its price tends to rise. In the past 50 years, investors have seen the price of gold soar and the stock market has plummeted during periods of high inflation. This is because when fiat currencies lose purchasing power due to inflation, gold is often priced in these currency units, so it tends to appear alongside everything else. In addition, gold is seen as a good means of holding value, so when people think that the local currency is depreciating, they may be encouraged to buy gold.
Deflation is defined as a period of falling prices, slowing business activity, and the economy being burdened with excessive debt. This has never happened in the world since the Great Depression in the 1930s (although there was a small degree of deflation after the 2008 financial crisis) In some parts of the world). During the Great Depression, the relative purchasing power of gold soared, while other prices fell sharply. This is because people chose to hoard cash, and the safest place to hold cash at the time was gold and gold coins.
Gold not only maintains its value during periods of financial uncertainty, but also maintains its value during periods of geopolitical uncertainty. It is often referred to as a “crisis commodity” because when world tensions escalate, people will flee to a relatively safe place; in this case, it tends to outperform other investments. For example, this year the price of gold has experienced some major price fluctuations in response to the crisis in the European Union. When people’s confidence in the government is low, its prices tend to increase the most.
Since the 1990s, most of the gold supply on the market has come from the sales of gold bars in central bank vaults around the world. The sell-off of global central banks slowed sharply in 2008. At the same time, the output of new gold from the mine has been declining since 2000. According to data from BullionVault.com, annual gold mining production dropped from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 (however, according to the U.S. Geological Survey, gold production reached nearly 2,700 metric tons in 2011.)It may take 5 to 10 years for the new mine to be put into production. Generally speaking, a decrease in the supply of gold will push up the price of gold.
Increase in demand
In the past few years, the increase in the wealth of emerging market economies has boosted the demand for gold. In many of these countries, gold is intertwined with culture. In China, gold bars are a traditional way of saving, and the demand for gold has been stable. India is the world’s second largest consumer of gold; it has many uses there, including jewelry. Therefore, the Indian wedding season in October is traditionally the time of year when the global gold demand is highest.
Investor demand for gold has also increased. Many people are beginning to see commodities, especially gold, as an investment category for which funds should be allocated. In fact, as of 2019, SPDR Gold Trust has become one of the largest ETFs in the United States and the largest holder of gold bars in the world.
The key to diversification is to find investments that are not closely related to each other; gold has historically been negatively correlated with stocks and other financial instruments. Recent history proves this:
- The 1970s was very good for gold, but very bad for stocks.
- The 1980s and 1990s were good for stocks, but terrible for gold.
- In 2008, as consumers switched to gold, stocks fell sharply.
Appropriately diversified investors combine gold with stocks and bonds in a portfolio to reduce overall volatility and risk.
Gold should be an important part of a diversified investment portfolio because its price will rise in response to events that cause the value of paper investments such as stocks and bonds to fall. Although the price of gold may fluctuate in the short term, it always maintains its value in the long term. For many years, it has been a tool to hedge against inflation and the devaluation of major currencies, so it is an investment worth considering.
(For related reading, see “In the long run, is gold a good investment?”)