Gold is a commodity with plenty of attributes. It’s shiny; it doesn’t decay, it can conduct heat and electricity, it’s ductile and malleable.
But gold is also an investment, and there are plenty of reasons to invest in gold.
Gold has proven itself time and time again throughout history as an important tool to preserve wealth. It has maintained its purchasing power over time. An ounce of gold has historically always been able to buy you a decent suit.
Gold can maintain its value over time because it’s scarce. There is a limited supply of it; it’s one of the most attractive things about gold. It can’t be printed into existence; it has to be mined.
Gold is also considered a hedge against rising inflation and instability. When there’s economic turmoil, investors will flock to gold. In saying that, gold can be volatile, has no yield, and costs money to store.
But investing in gold can be a great way to diversify and be a great asset to have when there’s instability and uncertainty.
Investing in gold
Today, there are many ways you can invest in gold.
One way to invest in gold is by buying physical gold. Physical gold can come in many different shapes and forms like coins, bars or even jewellery.
There are plenty of advantages to owning physical gold. The main one is that you are investing in something tangible. Also, physical gold is easy to buy, sell or transfer. It’s simple to understand in a way; what you see is what you get with gold.
There are some disadvantages though.
It doesn’t have a yield, and it costs money to store physical gold. And of course, the price of gold can also fall.
Another way to make a gold investment is what is often referred to as ‘paper gold’.
This is an asset that derives from physical gold. Things like gold exchange traded funds (ETFs) and gold mining stocks.
There are a few advantages to paper gold. First, it’s very liquid. There’s no need for you to carry your gold into the dealer to sell it. And, unlike owning physical gold, there’s no need to pay for storage fees or insurance.
The main disadvantage is that you don’t own tangible gold, which leaves you exposed to counterparty risk.
But investing in gold is a lot easier these days, and there are plenty of options to do it.
Is gold a good investment?
Humans have always been captivated by gold. Throughout history, it’s been the thing that moved people to travel to distant lands to find it. It’s been viewed as a form of wealth and accepted as a form of payment.
Gold historically has been an intrinsic part of our monetary system. In 1971 though, our financial system cut all ties to gold and currencies turned fiat. That is, they are not backed by anything.
Since then some people have dismissed gold as a thing of the past, a barbaric relic, that’s because gold doesn’t pay a yield and (in the case of physical gold) it costs money to store.
But gold has been a good investment over time. The price of gold has come a long way from US$35 an ounce in 1971.
During the coronavirus pandemic and lockdowns, we saw another rush into gold investment, and gold prices hitting record highs. There was plenty of uncertainty along with fears of inflation after central banks flooded the economy with money to avoid an economic catastrophe.
The thing is, the virus didn’t hit at the best time.
Central banks had already lowered interest rates at lows and had applied unconventional policies like quantitative easing to keep the 2008 crisis at bay. So, when the pandemic hit, interest rates were already at record lows, and many of the world’s economies were already carrying high debt.
There’s a lot of uncertainty ahead, so in short, gold can be a great investment to have as a way to diversify and have somewhat of a safe haven asset.