Gold Investing: 5 Things You Have to Know

What you should know about gold investment?

Gold is honored around the world for its rich history and value. The fact is interwoven into cultures and this is the story of different cultures for thousands of years. Gold coins appeared in 800 BC. The first pure gold coins were held by King Croesus after 300 years later.  Over the centuries people have been holding gold for several reasons. Underlined are some of the reasons why people possess gold these days:

History of holding gold’s value: Gold coins are treated differently as compared to the paper currency. Coins are known as assets and gold has always been successful in maintaining its value throughout the centuries. People consider the gold to be as a way of passing and preserving the wealth from one generation to the next.

US Dollar’s weakness: No doubt US Dollar is one of the most significant reserves today. When its value fell against other currencies; it flocks people towards the security of gold. It has been seen to happen in the years between 1998 and 2008. At the same time, the gold prices were tripled between the same time periods. It reached to $1000 an ounce in early 2008 while it was doubled between 2008 to 2012; where it reached to $1800 to $1900. There have been several reasons for the decline in US dollar including the trade deficits and huge budget of the country.

Inflation: Gold has always proven to be a great hedge against the inflation. It is because the price of gold has risen as soon as the cost of living is elevated. Over the last 5 decades, investors have seen the gold prices being soar and stock market plunging during high inflation years.

Deflation: It is a period where prices usually decrease; business activities are hindered and slow down ultimately burdening the economy with excessive debts. During such times purchasing power of gold flies while other prices are dropped considerably.

Geopolitical uncertainty: Gold tends to retain its value in times of financial as well as geopolitical uncertainty. Other name for the gold is “crisis commodity”.  The reason behind is that people feel them relatively safe possessing gold when they see world tensions rising. At such times, the gold is considered to outperform the other kinds of investment.

Increasing demand: Increased wealth of the emerging economies has boosted the demand for gold. Demand for the yellow metal has grown among investors where they tend to see the commodities particularly the gold.

Portfolio diversification: The key to perfect diversification is to find the investments that are not closely correlated. Gold enjoys negative correlation to other financial instruments. Recent history has shown the same trends:

  • The year 1970 was great for gold while terrible for the stocks
  • 1980s and 1990s were attractive for stocks but hideous for gold
  • 2008 saw the stocks being dropped with consumer being migrated to gold

Gold is a significant part of diversified portfolio of investment. With the rise in prices, the value of paper investments such as bonds etc tends to decline. It is worth stating here that gold has been hedge against inflation and erosion of currencies.             

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