It is lustrous and metallic and quickly melts into bars, coins, and jewelry. It is impervious to rust, corrosion, and deterioration. Gold of course is…well, golden. However, why is gold so important in our minds and as a worldwide store of value and medium of trade in reality? Why is silver consigned to a distant second position and what about poor old copper, which has several physical properties with gold? Join us as we attempt to decipher the answers to these and other pertinent questions.
- In the subsequent articles, we will examine gold’s place in our economy and attempt to determine why it is valued and what function gold may play in investor portfolios today.
- In fact, by some estimates, gold has never been more attractive as insurance against financial crises and inflationary pressures associated with fiat money.
- We will explore the dangers and rewards of holding gold as an investment, how to earn quickly by day trading it in the commodity market, what factors affect its price, or how to go about having gold in your investment account.
Gold as an Investment
Before we jump on the gold carousel, let us moderate our excitement for gold and examine some of the underlying reasons why gold investment has some problems. The fundamental drawback of gold is that it is neither consumed nor depleted, unlike other resources like oil or wheat. When gold is mined, it is inextricably linked to the global economy.
On the other hand, a barrel of oil is converted into gasoline and other products that are used in the gas tank of your automobile or the aircraft engines of an airplane. Grains are swallowed through the food we consume and the food consumed by our animals. Whatever the final destination of gold, the metal’s molecular composition assures that it will never deplete-it is everlasting.
As a result, the supply and demand theory that applies to commodities such as oil and wheat does not apply to gold.
In other words, even if demand again for metal decreases, supply will increase.
The Supply Issue is Overcome by History
Since the beginning of recorded history, gold has fascinated human populations more than almost any other commodity. Over money and mercantilism, empires and kingdoms were established and destroyed. Gold was widely acknowledged as a good form of payment as cultures progressed. In summary, history has endowed gold with a strength unmatched by any other commodity on the earth, and that strength has never truly waned. The United States monetary system was predicated on a gold standard until the 1970s. Proponent of this standard suggests that because the quantity of credit produced is connected to a tangible supply of gold, it effectively restricts credit expansion and imposes discipline on lending standards. It’s difficult to dispute such a line of thought after almost three decades of credit expansion in the United States resulted in the September 2008 financial catastrophe.
Fundamentally, gold is considered a positive hedge against inflation. Gold is an excellent store of value against a depreciating currency.
Investing in Gold
The most straightforward approach to gaining gold exposure is investing in the stock market, where you may purchase actual gold bullion or the shares of gold mining companies.
Physical gold does not offer the leverage that gold mining equities give. Profit margins for miners expand considerably when the price of gold climbs. Assume that a mining company gets a profit margin of $200 on a $1000 gold price. If gold prices climb 10% – $1100 per ounce, gold miners’ operating margins improve to $300 – a 50% increase.
Naturally, there are extra variables to consider when investing in gold mining companies, including political risk (many are located in third-world countries) and difficulty maintaining present gold production levels.
Because of its availability, gold has traditionally been a popular investment option. Gold has proven to be a profitable investment that can easily operate as an investment protection in times of crisis when compared to other types of investments such as shares and bonds.
Gold may be purchased in a variety of ways, including exchange-traded funds (ETFs), shares in gold miners and associated companies, or as a physical commodity. These investors have many reasons for investing in metals as they do tactics.
The most popular method of investing in actual gold is through the SPDR Gold Shares (GLD) exchange-traded fund (ETF), which contains only gold. When investing in ETFs, keep an eye on the net asset value (NAV), even as the purchase price might occasionally surpass the NAV by a significant margin, particularly during bull markets.
Barrick Gold Corp. (ABX), Newmont Corp. (NEM), and AngloGold Ashanti Ltd. (AU) are among the gold mining firms. Passive investors seeking broad exposure to gold miners may be interested in the VanEck Vectors Gold Miners ETF (GDX), which invests in all major miners.
Considerations for Alternative Investments
While gold is a fantastic inflation hedge, it is by no means the only one. Commodities benefit from general inflation because they have pricing power. While investing in commodity-based businesses should be to identify the lowest-cost producer(s). More cautious investors may prefer inflation-protected investments such as TIPS. The very last thing you want is to be sitting passively with cash, assuming you’re doing well while your dollar’s worth erodes.
The precious metal has historically been a haven during fear and paranoia, which frequently accompany economic recessions and depressions.
The following articles will discuss how and why gold obtains its essential worth, how it is utilized as a medium of exchange, and which factors ultimately affect its market price – from miners to investors to central banks. We’ll examine the basics of gold trading and the various assets and instruments that are frequently utilized to obtain exposure to gold investments. We’ll look at gold as a day trading asset and a long-term component of a well-balanced portfolio. We’ll analyze the advantages of gold and the risks and problems and determine if it lives up to the “gold standard.”
First, let us consider the following: Why Has Gold Been Valuable Throughout History?