Have you ever heard the expression, not everything that glitters is gold?
That’s something that can certainly apply to investing, as every day, most of us are touted with claims of the latest, best investments, everything from commodities to art are investable. The question is, should we still consider gold as a worthwhile or needed investment?
There was a time when owning gold was limited to physical possession, but those days are long in the past. Today there are mining stocks, gold funds, commodities, coins, jewelry, coins, and bullion. The options are wide and varied, but the question is, what is the purpose of gold and is it needed in today’s world?
Two Schools of Thought
There are always disagreements concerning investments, that’s a constant and crosses all boundaries of trading, particularly gold investing.
School of Thought #1
This group believes gold is an archaic relic and has no place in modern financial infrastructure. They argue that today, we use paper and electronic currency, and the need for gold has diminished, only being useful for jewelry and selected scientific needs.
School of Thought #2
On the opposite side of the equation are the investors who, while believing in diversification, also believe that gold has intrinsic value, and should be part of any savvy investor’s portfolio and gold, as a traditional investment, is far more conventional than something like baseball cards!
In this article, we’ll focus on…
- Does gold have a place in today’s financial markets?
- Why you should invest in gold
- How to invest in gold
A Look Into the History of Gold
To gain a working knowledge of gold and decide if is a worthwhile investment, it’s wise to examine its roots.
Gold is elemental to the very fabric of our world, and while its history dates to the formation of our planet, its ornamental use dates to ancient Egypt, approximately 5,000 years ago. It was then that gold was used ornamentally by the Pharaohs and high priests of the day. However, it wasn’t until 560 BCE, that gold began to be used as currency. Merchants, who circulating and trading through a vast area, searched for a means of trade that would be a constant, no matter where their transactions occurred. Overtime, and likely over many heated discussions, the creation of gold coins, stamped with the empire’s seal were accepted as the standard for worldwide trade.
This meant that a gold coin in Rome, was equal to a gold coin in Greece, or any outlying areas, it became the accepted method of commerce. When this happened, the acquisition of gold began inn earnest and spread through the known world of the era, such as Rome, Greece, and Africa. Time marched forward and in 1066, Great Britain, created their form of precious metal based currency with a British pound symbolized a pound of sterling silver. The Smaller denomination, such as shillings and pence stood for the amount of gold or silver they represented. Over time, gold began to represent wealth through all of Europe, moving into Asia, Africa and then America.
Within decades after the United States of America was declared independent, they continued the gold standard with the creation of a bimetallic standard. In essence, it stated that every unit of currency was backed by a measure of gold or silver.
Of course, things changed and this method of exchanged evolved with the times. In the 1900’s world events would influence gold and lead it out of the monetary system. 1913 marked the creation of the Federal Reserve, who began issuing promissory notes (today’s paper money). These notes were a promise by the government that those notes could be exchanged for gold, on demand. Change continued, It’s inevitable, and 1934 marked the introduction of the Gold Reserve Act, actually stating that the U.S. government held title to all gold coins. This mandate marked the end of minting new gold coins, ushering in an era with the idea that gold coins, were no longer the preferred method of exchanging money. In 1971 the United States ended the gold standard stating the currency was no longer backed by gold.
With those thoughts in mind, is it worth an investor’s time to consider gold for their portfolios? In a word, yes, while gold may no longer be at the forefront of everyday buying and selling, it remains important in the economy of the world. This can be confirmed by examining the balance sheets of many world banks and the International Monetary Fund. Beyond this, banks worldwide are known to be focusing on increasing their gold reserves.
The Preservation of Wealth
Paper currency is relatively new; gold has been a symbol of wealth for countless generations. In essence, gold is unaffected by the passage of time, or the swings of the economy, gold can and has preserved wealth for centuries. Consider the following example.
In 1972 an ounce of gold was valued at $70 (yearly high). Because consumer prices were much lower at that time, a man could have purchased a quality business suit for that price. Since that time inflation, wars, trends, stock-market crashes and other factors have caused prices to soar, and the worth of that $70 has dropped like a stone, while the price of gold has risen steadily over the years, valued (as this is written) at $1,200 per ounce. Had you held that $70 in 1972 as paper currency, it would be worth little, had you held an ounce of gold, it would be valued at today’s price.
When investor’s face a declining USD and a rise in inflation, gold is the perfect hedge, acting as a stabilizing influence on the markets and a means for investors to diversify without substantial risk. This is a fact proven historically, as inflation has crept into double digits, the price of gold has risen accordingly.
Why Does Gold Rise When the USD Declines?
There are two reasons that gold prospers when the US collars decline.
- While gold trades globally, its price is quoted in US dollars. Because of this means that investors, like central banks, must sell their US dollars to complete a transaction. As this happens, the value of the US dollars declines as investors seek to diversify globally.
2.. As the US dollars weakens, other currencies increase. This decline, in turn, makes gold less expensive to investors holding that currency.
Gold is a Haven During Turbulent Times
The world is always changing, history, as well as the news channel constantly remind us of this fact. Some changes are welcome; others are turbulent, often based on political unrest, we only have to look at the Middle East or Africa to confirm this. Currency, indeed entire economies can collapse, making the currency of the country valueless. Investors, knowing this, look to gold as a means of preserving wealth and avoid being caught in an economic collapse.
Gold Allows Your To Spread Your Risk
Whether or not you’re worried about inflation, the decline of the US dollar, or the breakdown of a particular economy, gold is an excellent means of diversification. When looking at gold analytically, realize it is not tied to stocks, bonds or real estate.
How To Invest in Gold
As recently as our parent’s generation, certainly our grandparents, the only way to invest in gold was to have physical possession of jewelry, nuggets, or gold coin. Today investors have a variety of ways to buy gold:
- Gold Futures
- Gold Coins
- Gold Companies
- Gold ETFs
- Gold Mutual Funds
- Gold Bullion
- Gold jewelry
What’s The Golden Bottom Line?
The bottom line is always a personal decision and should be carefully considered by any investor. If you value the thought of physically possessing gold in the form of coins or bullion, then buying shares in a burgeoning gold mine may not be satisfying. Conversely, if your goal is to profit from rising gold prices, then take a look at gold futures.
No matter which school of thought holds sway, it is always wise to spread your risk, investing in gold can help you do just that.