When you start pondering the question of whether gold is still a good investment your mind begins to wander from gold exchange-traded funds (ETFs) to gold stocks to gold IRAs to buying physical gold. Today investors have several different options form which to choose when it comes to investing in gold. But before investing there arises two questions:
1. What is gold?
2. Why should I invest in gold?
For the last several decades these questions have divided gold investors. You have one school of thought which argues that gold is an outdated, even barbaric relic that has no real monitory value like it did in the past. Currently in our modern economy paper currency is the money of choice, even though its stability is often called into question. Continuing this particular school of thought, gold’s only benefit to the current economic environment is its use in jewelry.
The other school of thought, that is on the other hand of the spectrum, asserts gold to be an asset not a liability. It is considered to possess intrinsic qualities that are not only unique but are considered a necessity for investors to include in their investment portfolios. In this post we’re going to focus on the purpose of gold in the modern era and why you should include it in your investment portfolio. We’re also going to discuss the different ways you can invest in gold.
A Brief History of Gold
To fully understand the purpose of something we must always trace its origins. Therefore if we wish to understand the purpose of gold we must venture into the past at the start of the gold market. Gold’s history began in 3000 B.C. when the early Egyptians used the metal to form jewelry. Then in about 500 B.C. King Croesus of Lydia, which is the western part of modern day Turkey, created gold coins to be used as a currency in his country. When he was captured by the Persians in 546 B.C. they adopted gold coins into their economy.
Then in 560 B.C. gold really took off and started to act as a currency. To simplify trade, merchants needed a standardized form of money that was easily transferable. Since gold jewelry was already widely accepted and something that was familiar to most people around the world, the answer seemed to be the creation of a gold coin stamped with a seal.
From this point forward gold’s importance continued to grow. Gold had great influence in the Greek and Roman empires. In 1066 Great Britain developed its own metals-based currency. The British pound, which represented a pound of sterling silver, shillings and pence were all based on the amount of gold or silver that it represented. Throughout Europe, Asia, Africa and Americas, gold eventually became the symbol of wealth.
Continuing with the gold tradition, in 1792 the United States government established a bimetallic standard. The bimetallic standard was fairly simple, every monetary unit in the United States had to be backed by either gold or silver. For example, one U.S. dollar was the equivalent of 24.75 grains of gold. In other words, the coins that were used as money in the U.S. economy simply represented the gold or silver that was currently deposited at the bank.
But the gold standard did not last in the United States. There were several key events during the 1900s that eventually led to the transition of gold out of the monetary system. The Federal Reserve was created in 1913, at which time it started issuing promissory notes, the present day version of paper money, which guaranteed the notes could be redeemed in gold on demand. Then the Gold Reserve Act of 1934 gave title of all the gold coins in circulation to the United States government. It also put an end to the minting of any new gold coins. The Gold Reserve Act of 1934 essentially established the idea that gold or gold coins were no longer necessary in serving as money. Then in 1971 the United States abandoned the gold standard and its currency ceased to be backed by gold. With gold no longer used as currency, speculation as to its purpose and importance became temporarily vague.
Gold’s Importance in the Modern Economy
In light of the fact that gold no longer backs the U.S. dollar or other worldwide currencies for that matter, what significance, if any, does gold have today? In other words, why is it important? While gold is no longer used in everyday transactions, it is nevertheless very important to the global economy. Taking a look at the balance sheets of the central banks and other financial institutions will prove this point. These organizations currently hold 1/5 of the world’s above-ground gold. Also, many central banks are working toward adding their present gold reserves.
The significance of central banks turning back to gold is that it appears they are restoring gold as a central element in monetary management. So it appears that gold is returning as the bedrock of world money.
The reason for gold’s importance in our modern economic environment centers on the fact that this yellow metal has preserved wealth for thousands of generations. The same cannot be said for paper currencies. Let’s put things in perspective.
In the early 1970s one ounce of gold was worth $35. Let’s say that you had the choice of either keeping the gold or taking the $35. In the early 1970s both would offer you the same purchasing power. If you had the same ounce of gold today versus the $35 your purchasing power would be far greater than the paper currency. Essentially you would be able to buy a lot more with the gold than the $35. Holding on to the dollars versus holding on to the same value of gold will erode your wealth as inflation continues to erode the value of the dollar.
Gold as a Hedge against a Declining U.S. Dollar and Rising Inflation
What is important to the average investor is to either preserve or increase wealth. With a declining U.S. dollar and rising inflation gold can do both which has been proven throughout history. With rising inflation gold tends to appreciate. When knowledgeable investors realize that their money is losing value, they will turn to a hard asset that has historically maintained its value, i.e., gold.
One reason gold benefits from a declining U.S. dollar is because a weakened dollar makes gold cheaper for investors who hold currencies that appreciated relative to the U.S. dollar. This is why we have the potential of currency manipulation where unscrupulous investors seek to take advantage of this fact. Lower the U.S. dollar, your currency rises and you can buy more gold.
Gold as a Safe Haven
Another reality that an investor must face are tensions that exist around the world. Whether it’s the Middle East, Africa or elsewhere, these tensions cause political and economic uncertainty in our economic environment. During these times investors typically look to gold as a safe haven for their monetary assets. Why is this?
To answer this question we must once again look to history. During such times of turmoil which includes collapsing empires, political coups and failing currencies, those who have held on to gold were able to protect their wealth. In many cases they were able to use the gold to escape from the area of conflict. Therefore, when there is news of turmoil which automatically causes concerns of uncertainty, investors will often buy gold as a safe haven for their wealth.
Gold as a Diversifying Investment
Another advantage of gold is that it is a diversifying investment. Whether your concerns are about inflation, a declining U.S. dollar, or even wealth protection, it is historically clear that gold is a hedge against these circumstances and therefore an important element in your investment portfolio.
Different Ways of Owning Gold
Compared to years past, there are many more options available in how one invests in gold. Today investors can invest in gold by buying:
• Gold ETFs
• Gold Mutual Funds
• Gold Futures
• Gold Coins
• Gold Companies
• Gold Bullion
• Gold jewelry
For the average investor gold bullion or bars should be the choice. Holding physical gold offers you not only the safe haven for your wealth but offers more flexibility if you need to divest. Physical gold is less risky in that your investment is not subject to stock market fluctuations or failed mining companies in which you could lose your entire investment. Simply stated, buy physical gold.
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