Throughout history, gold has been a highly sought after commodity. Gold started appearing in coins around 800BC but it wasn’t until 500BC during the reign of King Croesus that the first pure gold coins were struck. Things haven’t changed much since those times and people continue to hold gold today for various reasons. Here are the top 8 reasons why investing in gold today is still as valid as it was over 2000 years ago.
Gold Holds Its Value
History has shown that gold holds its value extremely well. Unlike paper currency and other assets, gold doesn’t suffer from the same risk of devaluation. Gold is seen as an excellent way to preserve wealth and provide a legacy for future generations.
Weak US Dollar
Even though the US dollar is perhaps the most important of the world’s reserve currencies, it is still vulnerable to devaluation. Between 1998 and 2008, the value of the US dollar fell against other currencies and led to an increase of people investing in gold as a safe haven asset. Prices as a result almost tripled between 1998 and 2008, and hit a record $1000 an ounce in 2008. When the GFC hit, prices doubled again between 2008 to 2012, reaching an all-time high of around $1800 – $1900. Even today, the US dollar is still suffering due to monetary stimulus measures, budget blowouts and trade deficits.
Buffer Against Inflation
Gold has always been used to provide a buffer against inflation due to its value rising with the cost of living. Since WW2, there have been five peaks of inflation in the US – 1946, 1974, 1975, 1979 and 1980. The average real return on the stock market’s Dow Jones Industrial Average was -12.33%. Gold however, rose by an average of 130.4%.
Not since the Great Depression has there been a global slowdown of business activity due to excessive debt and falling asset values. In times of deflation, gold’s relative purchasing power has risen while the value of other assets like cash has fallen.
One of the attractive things about investing in gold is that it acts as a safe haven asset in times of geopolitical instability. Often referred to as the ‘crisis commodity’, gold’s value outperforms other types of assets during periods of war, civil unrest and political wrangling. For example, the instability currently being experienced in the European Union over the past few years has resulted in a spike in the price of gold.
Almost all the gold currently in circulation in the market over the past 20 years has come from the gold bullion reserves held in the many vaults of most global central banks. Since 2008, gold selling has shown a marked decrease along with a decline in gold production from the world’s mines. In fact, figures from BullionVault.com shows that annual global gold output dropped from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. Even though several gold mines have recently been brought into production and gold output has recently increased, generally it takes several years for gold mines to be brought into production, so supply will be restricted for the foreseeable future, thus increasing prices.
There has been an overall boost in the demand for gold over the past few years due to the increase in the overall wealth of the middle-classes in the world’s emerging market economies. In many of these countries, gold plays an important role in their religious and cultural beliefs. India, for example, has a deep-seated love for gold jewellery and this is particularly evident during their wedding season which occurs in October. Demand for gold spikes dramatically during this time. China also has traditionally used gold bars as a form of saving for centuries and their demand for gold has continued unabated.
In recent years, particularly in our current economic climate of uncertainty and political upheaval, investors flock to gold as the safe haven asset of choice. Many managed funds across the globe have been increasing their holdings in gold and so demand for precious metals, including gold, has risen dramatically as a result.
One of the best ways to protect the value of a portfolio is to diversify the types of assets that are being held and ensure that at least some of these assets do not correlate to each other. Historically, gold rises and falls in opposite directions to stocks and bonds so is a good asset to include in a portfolio. Gold’s inverse correlation to other forms of asset class is evidenced by recent history:
- Gold rose in value in the 1970s, but stocks fell
- Stocks rose in value in the 1980s and 90s, but gold dropped
- 2008 onwards and gold has risen dramatically while stock prices and US dollar fell
With a well-diversified portfolio, both volatility and risk can be reduced and investors can enjoy gains no matter what the general market is doing.
Investors should always include gold in their portfolio as its value almost always moves in opposite directions to other asset classes like cash, stocks and bonds. Gold’s price can be volatile when viewed short-term, however over the long-term it holds its value well and serves as an excellent buffer against the ravages of inflation and currency devaluation. This has been of particular interest to those of retirement age who have been increasing their holdings in gold using IRA rollover strategies to protect their retirement portfolio. You can find out more about the process to rollover into a gold backed IRA here and see whether or not this is something that you may be interested in pursuing further.