Gold has long been considered a symbol of wealth, status, and power. With a rich history that dates back to ancient civilizations, the allure of this precious metal has remained strong and unwavering throughout the years.
In recent times, gold exploration and mining have led to the discovery of new deposits, fueling the demand for gold and its role in our economy. This article aims to uncover the reasons behind gold’s value and explore the role it plays in investors’ portfolios today.
The Enduring Value of Gold: Why Is it So Precious?
Gold not only possesses a natural luster and a long-standing association with wealth, but it also serves as a means of preserving value and facilitating trade. Unlike other goods, gold is not depleted or utilized, giving it a perpetual sense of worth. As a protection against the diminishing value of money due to inflation, gold is viewed by many investors as a distinct asset class and a method of preserving their wealth.
Gold is different from other commodities like oil or wheat because it is not used up or consumed. When gold is mined, it remains in existence, unlike oil, which is converted into gasoline and other products that are eventually used up in vehicles or airplanes. Similarly, grains are eaten by us and our animals.
Gold, however, is transformed into jewelry, incorporated into art, stored as ingots in vaults, and utilized for various other purposes. The precious metal’s chemical makeup ensures that it is never used up and is always present.
This means that the supply-demand relationship that applies to commodities like oil and grains is not applicable to gold. Put in another way, the supply of gold will only increase over time, even if the demand for it diminishes.
History of the Value of Gold
Gold has captivated human societies throughout history, with empires and kingdoms rising and falling due to its influence. As civilizations evolved, gold became a widely accepted form of payment, making it more powerful than any other commodity.
The U.S. monetary system was based on the gold standard until the 1970s, with the value of a currency being pegged to the value of gold. The Bretton Woods Agreement established that the U.S. dollar could be converted to gold at a fixed rate, with other currencies valued in relation to the dollar. However, this ended in 1971 when President Nixon stopped the dollar’s convertibility to gold.
Supporters of the gold standard argue that it helps control credit expansion and enforces discipline in lending standards, as it links credit creation to a physical supply of gold. This argument is supported by the credit explosion in the U.S. that led to the 2008 global financial crisis. Gold is generally considered a good hedge against inflation, as it maintains its value even when a currency declines.
Gold as Part of Investors’ Portfolios
There are numerous options for investors interested in gold investments. One can directly invest in gold bullion, although the storage and insurance costs can be considerably higher than the bought price. A simpler way to invest in gold is by buying shares in gold-mining companies through the stock market.
This provides more leverage compared to investing in gold bullion. Some popular gold-mining companies include Barrick Gold Corp., Newmont Corp., and Agnico Eagle Mines Ltd. As gold prices increase, the profit margins of these companies can also grow significantly.
However, investing in gold-mining stocks also comes with risks, such as political instability in developing countries and challenges maintaining gold production levels. Alternatively, investors can choose exchange-traded funds (ETFs) that hold gold or shares of mining companies linked to gold prices.
The VanEck Vectors Gold Miners ETF (GDX) offers a good option for passive investors, as it includes investments in major mining companies. When investing in ETFs, it is crucial to monitor the net asset value (NAV), as the purchase price can sometimes be much higher than the NAV, particularly during market optimism.
Gold has always been a significant element in the human psyche throughout history. When viewed as an investment, gold is appealing due to its ability to withstand challenging financial situations and protect against the diminishing value of paper currencies due to inflation.
Even though the U.S. dollar and other global currencies are no longer directly linked to gold, as they were during the gold standard era, this precious metal still holds a crucial position in the world’s economy.
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