Gold has a long history that goes back to thousands of years. As we said here, “Gold came in common use in 3000 B.C. when Egyptians started making it into jewelry. It wasn’t until years later that gold began being used as a medium of exchange.” It has cultural significance in most parts of the world. Throughout most of this time, gold was money. Paper or “fiat currency” did not exist until fairly recently. However, today the investment trends in gold have changed.
Now, people invest in gold mostly for economic reasons. Investors all around the world buy it because they see gold as an inflation hedge. Here, in this blog, we’ll discuss five important reasons to invest in gold right now.
So, let’s start:
Gold as a Hedge
A hedge is an investment that offset losses in another asset class. It is the reason that investors buy gold to hedge against declining stocks, currency values or a falling economy. For example, gold prices doubled from 2002 to 2007 during that same period the dollar’s value, as measured against the euro, fell 40%. At the end of 2000 Gold was priced at $272.65 by the end of 2001 Gold was $276.50 which doesn’t sound like much until you realize that the New York Stock Exchange was down by 10.2% in 2001. In 2002 the market fell another 19.8% while gold rose to $342.75. Hedging doesn’t mean that gold always rises but it has a very low correlation rate to other assets like the stock market so a portion of your assets held in gold can drastically cut your losses in times of market panic.
It is A Safe Heaven
When it comes to a safe financial haven, it means that when an economic catastrophe happens, your investments save you from drowning. It is the reason that gold prices continued to increase despite the Eurozone crisis because investors kept on buying gold.
So, when the global economy is suffering, you can rely on your investment in gold. It is because the gold stock can be your ultimate way out from drowning in an economic crisis that has global impacts.
It’s A Direct Investment
By buying physical gold you own one of the few assets that is not simultaneously someone else’s liability. If you buy a stock, bond or deposit money in the bank all you have is someone else’s promise to pay. But if you own gold you have an asset that is solid, physical and free to be sold at a moment’s notice without relying on anyone else to pay you back. This became quite an issue in the crash of 2008 when even big banks’ obligations were suspect and investors began to wonder what paper obligations were really worth.
Deflation is generally considered to be “falling prices” or the opposite of inflation. It occurs when the credit or the money supply shrinks. During the 2008 crash we saw deflation as many asset prices fell including housing, stocks and most financial assets. These falling prices helped pull down other prices as consumers drastically cut back on purchases as they saw their wealth eroding.
Initially, gold prices fell along with other assets from a peak of around $1000 in March 2008 to just above $700 by November. This was primarily due to the fact that some people had to liquidate their gold holdings in order to cover other debts. But by November 2009 gold was back above $1200 while the stock market was still tanking.
And over the next few years, investors preferred gold over “paper assets” and the price rose to a peak of $1850 by 2011 while everything else floundered.
In this chart we can see how the GLD Exchange Traded Fund performed compared to the entire NYSE index on a percentage basis. The GLD ETF began trading at approximately 1/10 the price of gold. However, the amount of gold held by each share is eroded slightly over time as the ETF charges investors a 0.4% annual fee. So due to these fees, physical gold itself has performed slightly better than GLD.
But, as we can see from the chart above, even with that slight disadvantage, from 2005 GLD is up 226.44% while the NYSE (a broad measure of stock performance) is up only 41.37%.
The value of gold remains intact not only in times of economic crisis but also in geopolitical uncertainties. Gold is often called “crisis money.” It is because people flee to its relative safety when world tensions rise; during such times, it regularly outperforms other investments.
To sum it all up, you need to understand that the world economy is always changing. A small event anywhere around the world can have a significant impact on the global economy. So, it is important to hedge your investments not only remain safe but also prove to be profitable.
You might also like: