A History of Holding Its Value
Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next. Since ancient times, people have valued the unique properties of the precious metal. Unfortunately, gold is a finite resource that is rapidly dwindling. Though new gold veins are still being found, discoveries of large deposits are becoming increasingly rare. As a result, most gold production today is coming from older mines that have already been exploited for decades. In part, this is due to decreasing investment in discovery on the part of mining companies, though a larger factor is the fact that there may not be many large, undiscovered veins left in the world.
Weakness of the U.S. Dollar
Although the U.S. dollar is one of the world's most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices. The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012, hitting around the $1800-$1900 mark. The decline of the U.S. dollar occurred for a number of reasons, including the country's large budget and trade deficits and a large increase in the money supply.
Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Over the past 50 years investors have seen gold prices soar and the stock market plunge during high-inflation years. This is because when fiat currency loses its purchasing power to inflation, gold tends to be priced in those currency units and thus tends to rise along with everything else. Moreover, gold is seen as a good store of value so people may be encouraged to buy gold when they believe that their country’s currency is losing value.
Deflation is defined as a period in which prices decrease, when business activity slows and the economy is burdened by excessive debt, which has not been seen globally since the Great Depression of the 1930s (although a small degree of deflation occurred following the 2008 financial crisis in some parts of the world). During the depression, the relative purchasing power of gold soared while other prices dropped sharply. This is because people choose to hoard cash, and the safest place to hold cash was in gold and gold coin at the time.
Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the "crisis commodity," because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. For example, gold prices experienced some major price movements this year in response to the crisis occurring in the European Union. Its price often rises the most when confidence in governments is low.
Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. At the same time, production of new gold from mines had been declining since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 (however, according to Goldsheetlinks.com, gold saw a rebound in production with output hitting nearly 2,700 metric tons in 2011.) It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices.
In previous years, increased wealth of emerging market economies boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world; it has many uses, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold (though it has taken a tumble in 2012). In China, where gold bars are a traditional form of saving, the demand for gold has been steadfast. Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, SPDR Gold Trust, became one of the largest ETFs in the U.S., as well as one of the world's largest holders of gold bullion in 2008, only four years after its inception.
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:
- The 1970’s were great for gold, but terrible for stocks.
- The 1980’s and 1990’s were wonderful for stocks, but horrible for gold.
- 2008 saw stocks drop substantially as consumers migrated to gold.
Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.
The Bottom Line
Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering.
Retirement Insider is the best and most prudent way to embark on your investment. With the advent of the internet, investors can not only compare many different options, but do research into the topic of investment and precious metals and even draw on the knowledge of experts. This ensures you’re getting the absolute most value out of your money. You can also track market values in real time and even speak to other investors and financial advisors.
In the past, technology limited investors to buying in person or over the phone or catalogues, which narrowed their options and knowledge of their investments.
Historically, the best precious metals to invest in have been gold and silver, and the 2018 market promises to be no different. Gold ended 2017 in its most profitable year since 2012. Since the beginning of the year, both gold and silver have been holding steady gains.
Now is the best time to invest in gold. With the future of the economy heading towards an immediate downturn, it’s wise to secure your assets as soon as possible before gold prices begin to skyrocket.
It’s generally recommended that you not invest more than 10 percent to 30 percent of your portfolio in precious metals.
Investing in precious metals is a simple and lucrative way to diversify your investment portfolio. One primary benefit of buying precious metals is the stability of their worth over time in comparison to paper money and many other types of investments. This stability especially exceeds that of investments like stock and exchanges. An upside of this is that precious metals insulate their investors from sudden fluctuations in the market. Because of these factors, precious metals are renowned for maintaining and sometimes even increasing their worth during severe economic downturns, giving them independence from inflation based on the value of the dollar. In addition to these benefits, precious metals have the bonus of being tangible investments, which many investors value as added security, since you can control and monitor them as literally as possible (unlike investments like stocks and bonds).