Gold has been interwoven into various cultures around the world for years and is respected for its value and rich history. The first coins containing gold appeared around 800 B.C. About 300 years later King Croesus of Lydia produced the first pure gold coins. From that time forward people have continued to hold gold for various reasons. For our contemporary investment environment here are eight reasons to own gold.
1. It Has Historically Held Its Value
Throughout the ages gold has maintained its value unlike paper currency, coins and other assets. For centuries people have viewed gold as a way to preserve their wealth and then pass it on to the next generations.
2. It is a Safety Net When the U.S. Dollar Drops
The U.S. dollar is undoubtedly the world’s most important reserve currency. Therefore, when the value of the dollar drops as it did between 1998 and 2008, people ran to include gold into their investment portfolios. The reason is gold prices increase when the U.S dollar falls. During this time period between 1998 and 2008 gold nearly tripled, and between 2008 and 2012 it doubled, hitting around the $1,800-$1,900 mark. The reason for the decline of the U.S. dollar included the country’s large budget and trade deficits. In addition, there was a large increase in the money supply. Those who had gold in their investment portfolio did not suffer like those who did not.
3. It is a Hedge Against Inflation
Historically gold has been an excellent hedge against inflation. The reason is that when the cost of living increases, so does the price of gold. During high inflation years that have occurred in the past 50 years, gold prices have soared.
4. It Protects Against Deflation
Deflation is the opposite of inflation as prices decrease. This causes business activity to slow down and the economy becomes burdened with excessive debt. Fortunately this has not been seen since the Great Depression of the 1930s. While prices were dropping sharply during this time the purchasing power of gold soared.
5. It Retains Its Value During Geopolitical Uncertainty
Gold has the advantage of holding its value not only during times of financial uncertainty, but in times of geopolitical uncertainty as well. This is why it is often referred to as the “crisis commodity.” Characteristically people run to gold’s relative safety when tensions around the world begin to rise. The reason is that gold often outperforms other investments during tenuous times. The value of gold often rises when the confidence in government is low.
6. Supply Constraints on Gold
Since the 1990s a great deal of the supply of gold in the market has come from sales of gold bullion from global central banks. The selling of gold by global central banks vastly slowed in 2008. In addition, new gold production from mines had been declining since 2000. According to BullionVault.com, the annual output of gold fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. However, according to Goldsheetlinks.com, gold production rebounded in 2011, hitting nearly 2,700 metric tons. As a side note, it takes approximately 5-10 years to bring a new mine into production.
The importance of this discussion for you is to remember that as a general rule, reduction in the supply of gold increases gold prices.
7. Demand for Gold is Increasing
The demand for any asset generally raises the price. In previous years, as the emerging market economies increased wealth, the result was that it increased the demand for gold. Furthermore, in many countries gold is an integral part of the culture. For example, India is one of the largest gold-consuming nations in the world and it serves many uses. One example is its use in jewelry. During the wedding season in October, the demand of gold is at its highest in India, though it did take a tumble in 2012. Another example is China, where gold is viewed as the traditional form of saving wealth.
In addition to cultural norms, the demand for gold has grown among investors. Many are beginning to see the value of allocating a portion of their portfolios to gold. This is why a company like Regal Assets, which offers Gold IRAs, has grown so quickly. In helping people to set up Gold IRAs they are helping to reduce the volatility of their clients’ investment portfolios.
8. Gold Offers Portfolio Diversification
For the sake of stability, every investment portfolio needs diversification of assets. The key to diversifying your investment portfolio is finding investments that are not closely correlated to one another. The reason that gold is such a valued asset for investment is that it has historically had a negative correlation to other financial investments like stocks.
Properly diversified investors have a combination of gold and stocks and bonds in their investment portfolios to reduce overall volatility and risk.
The necessity of having gold in your investment portfolio is evident. It is an important element of a diversified investment portfolio because its prices increase in response to circumstances that cause prices of stocks and bonds to decline. Though in the short term the price of gold can be volatile, it has always maintained its value in the long run. Throughout the years it has served as an effective hedge against inflation and decline of major currencies. Therefore, it is an asset well worth including in your investment portfolio.
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