What is it about the gold market that attracts people?
Posted by Adam King on September 14, 2011
Investing in Gold: Is it Worth it? Pt. II
September 14, 2011 – As in the first part of this two-part series, the questions guiding the focus are:
- What is the expectation when investing in gold?
- What is it about the gold market that attracts people?
These questions are important because the USD is not backed by gold anymore yet is still a very important part of global economy (as well as any well thought-out portfolio).
To authenticate this fact, we only need to turn to central banks as well as the International Monetary Fund which together hold roughly one-fifth of the world’s supply above-ground gold. Looking at their reserve balance sheets, you find the importance of gold! Just as interesting is the fact that several central banks have concentrated their efforts on supplementing their present gold reserves.
Safeguarding Your Resources
For centuries, a verifiable truth is that gold has efficaciously protected wealth which is why it is still so significant within our modern economy. Can that be said about the greenback and other paper-denominated currencies? Contemplate the following before answering:
- 1970- one ounce of gold=$35
- Today, if you would have that same ounce of gold and converted it into modern prices, it is worth a whole lot more than the $35 in 1970. (I would rather have the ounce of gold rather than the $35!)
Reality: A Weakening USD = GOLD Uproar
The idea that gold preserves wealth is indeed more important in an economic setting where investors are confronted with a waning U.S. dollar and increasing inflation (because of growing commodity prices). Factually, gold has helped as a hedge with respect to both of these circumstances. When inflation rises, gold typically increases in value. When investors comprehend that their money is dropping in value, they will begin placing their investments in a hard asset that has traditionally kept its value. The 1970s demonstrate a key example of mounting gold prices in the middle of rising inflation.
The fact that gold is priced in U.S. around the globe is the reason that it profits from a weakening dollar.
Why?
1. To begin with, investors who are thinking of buying gold need to sell their U.S. dollars to complete this transaction. This eventually brings the U.S. dollar lower as global investors pursue diversifying away from the dollar.
2. An additional motive has to do with the fact that a dwindling dollar makes gold inexpensive for investors who hold other currencies. The end result is more demand from investors who are in possession of currencies that have increased in worth relative to the U.S. dollar.
The Safest Port in the Storm
Our contemporary economic situation embraces political and economic skepticism whether we are discussing controversies in the Middle East, Africa or elsewhere. It is because if this that investors normally look at gold as a safe haven throughout times of political and economic doubt.
What is truly behind the action of flocking to gold in times of political and economic uncertainty?
It’s quite simple to understand. Our history is brimming with folded empires, political overthrows, and the downfall of currencies. Throughout these times, investors who secured their gold were able to effectively safeguard their wealth and, in some cases, even take advantage of their stockpiles to retreat from the chaos. Thus, whenever there are news events that suggest some type of uncertainty, investors will often purchase gold as a safe haven.
Putting It All Together
This is precisely why owning gold is considered to be a diversifying investment. Irrespective of whether you are apprehensive about inflation, a weakening U.S. dollar, or even guarding your wealth, it is apparent that gold has historically functioned as an investment that can add a diversifying piece to your portfolio. If your reason is merely diversification, remember that gold is not linked to stocks, bonds, and real estate.
Various Approaches
These days there are different ways to invest in the precious metal as opposed to hundreds of years ago.
Physical
- Gold Coins (the safest way to invest in gold)
- Gold Bullion
- Gold Jewelry
Paper
- Gold Stocks (companies)
- Gold Exchange Traded Funds (ETFs)
- Gold Mutual Funds
- Gold Futures
As with all investments, there are advantages to each type. How you invest in gold depends upon your needs and desires.
Stewart Lawson
Senior Staff Writer – Certified Gold Exchange
Categories:
US Gold Market
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