7 Proven Reasons To Invest In Gold
Gold is one of the most valuable commodities on the market and has retained this status for many years. Investors can own gold as a financial asset, a luxury piece of jewelry, or hold it as a store of wealth.
This precious metal is seen by investors as one of the safest investments on the market since it has historically been seen as a safe-haven asset. It protects investments and preserves the value of cash in times of stock market volatility, economic turmoil, or geopolitical issues.
Here are some of the top reasons you should consider investing in gold.
Physical gold typically comes in the form of coins, bars, or jewelry. However, jewelry is usually not a high enough purity to be considered gold bullion.
1. Gold protects against market volatility
Long-term investors or day traders have to face short-term market risks like volatility. Yet they also must consider long-term economic risks. These include inflation, stagflation, geopolitical issues, and slowing economic growth, all of which impact market volatility.
Having an asset like gold in an investment portfolio can help ease these risks. Gold serves as downside protection in a scenario where other assets may suffer from volatility under market pressure or economic uncertainty. As investors see market tensions increase, they tend to pile into gold and send the precious metal’s price higher.
2. Gold hedges against inflation
A major economic risk people are facing on a global scale is high inflation. Inflation is defined as the gradual increase in prices of goods and services.
In the latest consumer price index reading, inflation increased 7.9% over a 12 month period in February. This is the highest reading we’ve seen in more than 40 years and there are little signs that inflation will be slowing down.
Sustained inflation in the 1970s led to a decade-long period of stagnant economic growth.
What does this mean for your money? As inflation increases, the value of your money decreases over time. This means it will require more dollars to buy the same amount of goods and services in the future. The market price of physical assets like real estate also may rise as a result.
Gold has historically been a natural inflation hedge. By investing in gold, you preserve the value of your money over time because the price of gold and inflation move in the same direction. Gold demand and gold prices tend to increase when inflation of the money supply increases.
3. Gold is a great portfolio diversifier
Gold is a suitable portfolio diversifier because it is uncorrelated to conventional assets like stocks and bonds. The prices of stocks, bonds, and exchange-traded funds (ETFs) are more sensitive to market volatility. When traditional assets experience market losses, gold tends to experience less losses compared to equities. Many investors also hold gold because it is highly liquid.
Depending on whether the economy is performing well or poorly, certain market sectors will be favored over others. Stocks can fluctuate as a result. However, the benefit of having gold as part of a diversified portfolio means you are holding an asset that offers stable performance whether the economy is in a recession or is expanding. This is the hallmark of a balanced portfolio.
Investors can count on gold to act as a portfolio stabilizer because its value is generally not as susceptible to large price swings. This holds true even in an economic downturn or financial crisis. It is another reason why owning gold is often seen as a long-term investment.
4. The U.S. dollar is getting weaker
The U.S. dollar is considered the world’s reserve currency, but there are several factors that have contributed to a weakening U.S. dollar. The central bank of the U.S., the Federal Reserve, controls monetary policy. The Fed has set exceptionally low interest rates, which encourages people to borrow money.
Seal of the Federal Reserve Board of Governors
This easy availability of money eventually leads to a depreciating dollar. In other words, your paper money is worth less and less. Furthermore, since the U.S. dollar is not backed by gold, it can be printed endlessly. As there is more money being printed, the dollar is less scarce and as a result less valuable. The cost of living increases as a result, as well.
When this happens investors often flock to gold because it is a tangible asset (i.e. "hard money"). This gives gold intrinsic value because of properties as its scarcity, durability, and high demand. While gold tends to be uncorrelated (a low correlation) to the prices of other assets, it usually exhibits an inverse correlation (a negative correlation) with the purchasing power of the dollar.
5. Gold is a scarce resource in high demand
Gold is in high demand as an investment. The size of gold’s market capitalization is vast valued at more than $12 trillion. This major asset class has high liquidity, making it one of the most traded assets in the world. Many investors sell gold or enter gold trading for this very reason.
The reason why gold is valuable is because of supply and demand. Gold is a scarce precious metal which means its supply is finite. Gold is difficult to produce and the costs associated with mining the precious metal are high, including exploration and extraction of gold from the earth.
Furthermore, gold mining doesn’t necessarily result in massive amounts of gold being produced. It's still a limited supply. Combine that with gold’s high consumer demand and many use cases, and the result is its value increasing. As a gold investor, it can be helpful to stay up-to-date with gold market trends and gold mining companies to understand how the future value of gold may change.
6. Gold has a history of strong performance
Gold has a strong history of performance as an investment, making it an attractive asset to own as part of a diversified, long-term portfolio. The price of gold currently stands at roughly $1,900, and its value is up more than 11% on a year over year basis. For the past 20 years, gold has returned more than 560% to its investors.
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Chart of gold prices in USD over the past 20 years.
Gold hit its peak price in August 2020 surpassing the $2,000 mark. Its value experienced some volatility during the pandemic, but also increased during this time period. Today, as the war between Russia and Ukraine escalates, the value of gold has been increasing. Meanwhile, there is geopolitical uncertainty inside and outside the United States, the stock market is experiencing volatility, oil and gas prices are soaring, and inflation in the overall economy persists.
7. Gold is a safe-haven asset
Gold is considered a safe-haven asset. This means that when other asset classes are volatile or are not performing well, investors can rely on gold as a defensive investment when stocks, for example, are risky. In short, it's a safe place to park your money. This is why investors flock to gold during times of market underperformance. During stable market conditions, gold does not tend to outperform, but over time it maintains its value.
Gold does have currency characteristics as an asset. Unlike gold, other fiat currencies like the dollar are always at risk of losing value. Investors globally can use gold as a safe-haven asset because it is not strongly correlated with other commodities or the stock market, nor is it linked to a national currency. Rather, the value of gold is more influenced by the performance of the broader economy.
Although past performance is no guarantee, gold has a strong track record in the long run of serving as a safe haven.
8. Gold is held as an international reserve
Although the world is no longer on a gold standard, central banks in many countries still buy physical gold as a reserve asset. According to a survey by the World Gold Council, at least 25% of central banks around the globe plan on purchasing gold this year. This is the highest percentage to do so in the last five years.
There is a rich history of gold being used to back paper currencies. Even if it's not by law, rest assured that major currencies around the world have always maintained a connection to gold. Gold coins and silver coins still function as a stable form of savings for governments and large institutions.
Be Realistic About Gold's Role In Your Portfolio
Gold is an asset that has many use cases in several scenarios. It is a precious metal commodity and is incorporated into millions of investment portfolios globally. Investors recognize the value that gold brings in a diversified portfolio, especially during times of market stress.
While gold is not an asset that can promise outsized returns, its role is to level your investments when there is uncertainty in the world.
Any investor who wants to
- protect the value of their money
- diversify their investments
- hedge against inflation and other market risks
should consider adding gold in their portfolios in its many forms including physical gold bullion, gold stocks, or exchange-traded funds that track the gold spot price. So aside from owning physical gold, in physical form like gold bars, individual investors or financial advisors can get exposure to the metal through financial instruments such as gold ETFs, gold mutual funds, or gold futures.
In a world of uncertainty, it puts investors at ease to invest in a reliable and historically sound investment like gold.
Written by Paulina Likos
Read more about how to buy physical gold, silver, and precious metals from the expert authors at Gainesville Coins:
Investing in Gold for Beginners
How to Invest in Gold and Silver IRAs
Best Place to Buy Silver: Low Prices from a Trusted Dealer
How to Buy Gold Bars: Buyer's Guide
What Is the Gold/Silver Ratio? Definition and Trading Strategies
[How to Invest in Gold Stocks[(/blog/how-to-invest-in-gold-stocks)