Gold has a number of properties that have made it a valuable commodity over the years. Physical properties such as attractiveness, malleability, and non-corrosiveness are among them.
Other characteristics of this precious metal make it a desirable asset as well. Gold has been a store of wealth for ages. It is also a commodity in high demand for industrial use in more recent times.
We’ll look at seven reasons why gold is a good investment. You could be considering purchasing gold coins or putting money into a gold IRA. Here are some of the reasons why gold is a good addition to your financial portfolio.
What Are the Benefits of Investing in Gold?
- Long-term financial commitment
- Inflation protection
- Diversification of your portfolio
- Banks and companies are not allowed to influence the outcome.
- a genuine asset
- Bartering worth
- Asset in high demand
All of the above factors combine to make gold one of the most valuable metals on the planet. These characteristics also contribute to the lustrous metal’s high demand and turnover, ensuring that you will always have a buyer when you need to sell.
Investment for the Long-Term
Purchasing gold has always been a buy-and-hold strategy. Gold is a long-term investment that preserves and gains value over time. In terms of annual returns, gold has had an excellent performance over the last 50 years.
Nixon abolished gold convertibility in 1971. The graph below shows that gold had a pretty steady price performance in the decades leading up to 1971. The surge in value of gold since its price is allowed to float against the dollar has been phenomenal.
The performance trend we’ve seen over the last 50 years appears to be continuing. Gold will very certainly never be locked in at a fixed price again. Its worth will continue to be determined by the financial market’s efficient dynamics.
It’s vital to compare gold’s performance to that of the overall stock market over the last 20 years. The price of gold is compared to the Dow Jones Industrial Average index in the graph below.
We can see that gold has beaten the Dow Jones index by about 300 percent since 2000. Gold has not only been a safe haven asset but has also outperformed the stock market over the last 20 years.
Hedge Against Inflation
Gold is well-known for its ability to combat inflation. Gold has managed to preserve or grow its value during previous inflationary eras. Stocks, on the other hand, will often do poorly during periods of rising inflation.
This positive link to inflation is based on the idea that gold should maintain its value against the US dollar. When inflation is high, the value of the US dollar depreciates more fast. To compensate for the dollar’s loss of value, gold investors will demand additional dollars.
The graph below depicts gold’s performance during periods of high inflation. We can observe how the price of gold tends to rise in tandem with inflation. Gold has maintained or gained in value during the three most recent periods of significant inflation (above 4%).
Diversification of your portfolio
Diversification refers to the idea of investing in a number of assets to avoid being exposed to a single risk. You generally have multiple equities in your stock portfolio, so you aren’t completely exposed to the hazards of any one company.
Asset classes follow the same rule. No shrewd investor will put his entire portfolio into a single asset. If you just own one asset class and that asset class is affected by a crisis, the danger of serious losses is exceedingly high.
Adding bonds to your stock portfolio and preserving some cash is the standard diversification technique. Adding a third, fourth, or fifth asset class, on the other hand, will help to diversify your portfolio even more.
Correlation is lacking
Gold diversifies your portfolio and minimizes your reliance on traditional assets, helping you to weather the storm better. Because gold’s price is uncorrelated with the price of stocks and bonds, it possesses this property.
If you possess assets that have little or no correlation to the broader stock and bond markets, those assets will take their own path in times of adversity.
Because gold is seen as a safe-haven asset, it has a low correlation to stocks. When there is a general sell-off in the stock market, investors turn to gold as a safe haven.
Banks and Corporations are not allowed to participate.
When you buy in stocks, you run the risk of a firm failing or underperforming due to poor management. Of fact, it is that risk that provides a sufficient reward to recompense shareholders for their investment.
There is also a banking risk, which is mitigated to some extent by FDIC insurance, which insures funds maintained at your bank up to $250,000 per account holder. If you have multiple account categories, this number can rise.
You are, however, still at risk from the banking system. Especially if you have a lot more cash on hand than the FDIC covers. The value of gold is unaffected by either of these dangers.
Banks and companies may fail, causing significant losses to your capital, but gold will retain its worth regardless.
A genuine asset
Gold is a physical asset that is not dependant on any financial, corporate, or government-backed entity. The value of the precious metal exists independently of any sort of securitization.
You have a resource that has stood the test of time in your possession. It does not require upkeep, tenant management, or appraisal to determine its value, unlike real estate, another important real asset.
Gold cannot be readily hacked or stolen. They are kept in a secure location with no easy access. Because of the digitalization of assets, financial institutions and securities are vulnerable to being hacked, even if this is an uncommon occurrence. In the past, some criminal experts have preyed on cryptocurrencies in particular.
Value in Barter
Riches has long been used as a kind of payment, and there have been times when rulers used their gold to recruit armies. I doubt very much that anyone nowadays would refuse to swap goods for gold.
What would happen if a catastrophic event occurred? Everything fails because of something so vast and unpredictable. In the event that money becomes useless, gold will once again be the only valuable asset.
Owning gold would most likely be one of the only things you could use to buy items in the event of a global catastrophe. A means of creating transactions and a universal measure of worth. Although the scenario I am imagining is extremely unlikely, gold still has the power to resist even the worst disaster.
Asset in High Demand
The valuable gleaming metal has always been in high demand, and there doesn’t appear to be any reason for that to change. In fact, it appears that there are a plethora of causes for gold demand to rise.
Investment accounts for the majority of gold demand. Individuals, companies, and funds all contribute to getting the biggest slice of the pie. The distribution of gold demand by sector is depicted in the graph below.
Gold has always been a highly sought-after substance simply because of its beauty. Its ductility, malleability, and permanently gleaming hue make it ideal for jewelry. The total demand for gold is still dominated by jewelry.
But why do jewelry and investment play such a big role in gold demand? As the world becomes wealthier, as evidenced by the fact that global GDP has been increasing for decades, demand for gold for jewelry and investment will continue to rise.
Final Thoughts
We’ve seen how gold is a unique physical asset due to a number of factors. Its capacity to operate as a portfolio diversifier while combating inflation is perhaps the most well-known and discussed feature.
Gold, on the other hand, has these plus a mixture of other characteristics, as indicated above, that contribute to its great appeal. These are also traits that have existed for a long time and will very certainly continue to exist in the future.
I’m stumped when people ask me how much gold will be valued in five years. But I’m confident that the demand for this yellow metal will continue to grow in the near future. All of the attributes listed above have stood the test of time for thousands of years.
You may be considering adding gold to your investing portfolio and wondering how to do it. You can purchase gold by purchasing shares in a gold fund or by holding the asset physically. Setting up a gold IRA is a viable alternative if you wish to possess gold physically.
