Every investor as their own reasons for picking specific investments. Investing in gold may provide investors a hedge against inflation and economic uncertainty. It can also divefsify an investment portfolio, reducing overall risk due to its potentially low correlation with other asset classes. Additionally, gold maintains intrinsic value over time, preserving wealth through various economic conditions as it’s used in certain industries.
Below are eight practical reasons to think about owning some gold.
Key Takeaways
- Throughout history, gold has been seen as a special and valuable commodity.
- Today, owning gold can act as a hedge against inflation and deflation alike, as well as a good portfolio diversifier.
- As a global store of value, gold can also provide financial cover during geopolitical and macroeconomic uncertainty.
- Gold has an actual purpose as it’s been used in electronics and dentistry.
- Gold is becoming easier and easier to buy, and you can now own gold without having to physically maintain or secure it.
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. Gold is respected around the world for its value and rich history, which has been recognized by cultures for thousands of years. Coins containing gold appeared around 550 B.C., during the reign of King Croesus of Lydia.
Throughout the centuries, people have continued to hold gold for various reasons. Societies, and now economies, have placed value on gold, thus perpetuating its worth. It is the metal we fall back on when other forms of currency don’t work, which means it always has some value as insurance against tough times. It also has real-world implications in technology, dentistry, and other industries.
Gold doesn’t corrode and can be melted over a common flame, making it easy to work with and stamp as a coin. Moreover, gold has a unique and beautiful color, unlike other elements. The atoms in gold are heavier, and the electrons move faster, creating the absorption of some light—a process that took Einstein’s theory of relativity to figure out.
Reasons to Own Gold
Let’s take a look at some of the main reasons to own gold. This list is random order and does not necessarily reflect the importance of the reason.
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 from 1998 to 2008—this often prompts people to flock to the security of gold, which raises gold prices. The price of gold nearly tripled from 1998 to 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling from 2008 to 2012, rising above the $2,000 mark. Changes in the U.S. dollar can occur for a number of reasons across many different timeframes; as the value ebbs and flows, so can demand for gold.
Inflation Hedge
Gold can be a hedge against inflation because its price tends to rise when the cost of living increases. Investors can periodically see 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 local currency is losing value. Note that all markets and economic conditions are changing, and the rules that may have resided at one point in time may no longer be true today.
Note
Although inflation soared in 2022, gold prices actually declined for most of the year, driven in part by the strength of the U.S. dollar against other currencies. However, with inflation remaining at persistently high levels alongside concerns about a potential recession, gold prices ticked higher in the final months of 2022 and early in 2023. Gold then achieved it’s all time high price in May 2024.
Deflation Protection
Deflation is defined as a period when prices decrease, business activity slows, and the economy is burdened by excessive debt. This 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 chose to hoard cash, and the safest place to hold cash at the time was in gold and gold coins.
Geopolitical Uncertainty
Gold retains its value not only in times of financial uncertainty but also 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, gold often outperforms other investments. Its price often rises the most when confidence in governments is low.
Supply Constraints
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, the production of new gold from mines has been declining since 2000.
According to BullionVault, annual gold-mining output fell to 2,444 metric tons in 2007 from 2,573 metric tons in 2000. Since then, gold production has posted a decade of gains, peaking at 3,300 metric tons in 2018 and 2019 before peaking again to 3,644 metric tons in 2023.
Increasing Demand
In previous years, increased wealth of emerging market economies boosted demand for gold. In many of these countries, gold is an integral part of the culture. In China, where gold bars are a traditional form of saving, the demand for gold has remained steadfast. India is the second-largest gold-consuming nation in the world; it has many uses there, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that fuels the highest global demand for gold.
Demand for gold also has grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, the SPDR Gold Trust (GLD) has become one of the largest and most frequently traded exchange-traded funds (ETFs) in the United States.
Portfolio Diversification
The key to diversification is finding investments that are not closely correlated with one another. Gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:
- The late 1970s were great for gold but terrible for stocks.
- The 1970s and 1980s were great for gold but terrible for stocks.
- The late 1990s and mid-2000s were excellent for stocks but horrible for gold.
Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.
Note
As of June 2024, gold achieved it’s most recent all-time high in May 2024.
How To Invest in Gold
Just because something is easy to buy, that doesn’t make it a good reason to own an investment. However, gold has become much easier to own. Investing in gold has become increasingly accessible, as the simplest ways to own it is through ETFs and mutual funds. Instead of having to physically own gold, you can own electronic shares that represent gold. This makes it easier to sell, own, hold, and secure.
Another convenient way to invest in gold is by purchasing gold bullion and coins. This method is favored by those who prefer tangible assets over something electronic like an ETF share. Gold bullion can be bought in the form of bars or coins, though you need to be mindful of costs and considerations for storing such goods.
Last, digital gold is a relatively new and innovative way to invest in gold. It tries to combine the physical benefits of gold. Online platforms sell digital gold, and an independent third-party securely stores the gold in their own insured vaults. You get a digital certificate of ownership in exchange.
Again, in addition to the eight good reasons to buy gold above, you could say that the fact that gold is fairly liquid is yet one more good reason (or at least it’s a convenient reason) to own gold.
Why Should I Invest in Gold?
There are many reasons to consider adding gold holdings to your investment portfolio. The precious metal has a history of maintaining its value, making gold a useful hedge against inflation. Gold prices tend to increase when the U.S. dollar is underperforming or during times of economic and political uncertainty. Finally, gold can provide an important level of diversification to your portfolio, as gold prices have historically shown a negative correlation with other asset classes.
What Determines the Price of Gold?
Gold prices can be volatile in the short term, but the metal has maintained its value over the long term. In general, movements in the price of gold depend on supply, demand, and investor behavior. Because the metal is often used to hedge against inflation, the pace of inflation—and market expectations for future inflation levels—can have an impact on gold prices. In addition, deteriorating economic conditions may bolster gold prices because the metal is seen as a relatively safe investment in difficult times.
How Can I Invest in Gold?
There are many vehicles for adding investment exposure to gold. It is possible to own the physical metal in forms such as bullion, coins, or jewelry, although storing and insuring physical gold assets can be costly. You can also buy the right to gold electronically through something like an ETF.
What Is the Difference Between 24k, 22k, and 18k Gold?
The difference lies in the gold content: 24k is pure gold, 22k contains 91.67% gold, and 18k contains 75% gold, with the remainder being other metals.
Why Is Gold Valuable?
Gold is valuable due to its rarity, durability, and historical significance as a medium of exchange and store of value. It tends to hold it’s value during economic turbulence, and investors appreciate it’s potential for a safe haven. It is also used in jewelry and electronics, so there’s some real-world uses of gold.
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 always has maintained its value over the long term. Through the years, gold has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering.
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