Since the Discovery of Gold More Than 5,000 Years Ago, Civilizations Have Used It for Trade and Treasure
In ancient times, gold served as a primary resource for celebrating idols and decorating the houses of worship. From the 16th to 18th centuries, it was a foundation of mercantilism – those who found new resources and exploited known sources controlled the global economy.
In recent history, the US monetary system was based on a gold standard until the 1970s when the US government turned to a flat currency to increase spending and expand the economy.
Today, over half of the global demand for gold is from jewelers and manufacturers for medical and electronic devices. The second-largest group of gold consumers is investors. Central banks, whose job is to control the flow of money, keep cash currencies and gold as part of their reserves.
The price of gold is typically pegged to the value of the US dollar. Since gold is a precious metal, unlike cash, it has inherent value as a substance, creating a sense that it will retain value regardless of economic or political influences. Some investors consider gold as a safe haven because it often remains stable when the price of the US dollar decreases due to inflation or political instability. Investors can withdraw their cash balances and purchase gold.
By basic economic logic, this increased demand results in the increasing price of gold. And it also remains popular for institutional investors because it is believed that gold prices fluctuate independently of other asset classes like stocks and bonds, and thereby helps lower the overall risk in a portfolio.
Investing in gold begins with purchasing gold itself, gold stocks, gold funds, or gold futures:
- Purchasing physical gold typically comes in the form of coins and bars (species and bullions) of varying sizes.
Gold coins tend to be more popular among everyday investors because the cost to purchase an ounce of gold in the form of a coin is more affordable than the price of a gold bar.
Gold coins can be purchased from a reputable dealer with minimal effort, but they come at a premium of about 1% to 5% on top of the underlying price. Some gold coins hold historical significance and may cost more, which is why a standard coin like the South African Krugerrand and US Eagle are popular options.
Nonetheless, any investment in bullion still requires the owner to be responsible for storage and insurance as needed. Direct investment in gold can cause volatility because the change in price for gold will have an equal effect on a person’s portfolio. As with any investment, a balanced portfolio avoids this risk.
- If owning and maintaining gold physically is not an attractive option, then an individual could invest in public companies that mine and refine the commodity.
The share price of a company in this sector may not be directly impacted by the price of gold, but the stock is exposed to general commodity risks along with those of a typical business, such as operating costs and production. One benefit of purchasing stock is that is easier to sell than finding a buyer for a gold coin or bar. It also avoids potential storage fees and risks of theft.
- Gold mutual funds also offer better liquidity to buyers than physical gold.
Investors buy a share of a mutual fund using a brokerage or retirement account, and each share represents a fixed amount of gold. Gold mutual funds may also provide greater access for smaller investors since the price to own a share may be less than an ounce of gold. The cost of managing these funds is directly transferred to the consumer in the form of an expense ratio.
- Gold futures and options are the final and most risky methods of investing.
A futures contract is an agreement to buy or sell a certain amount of gold at a later date. The value proposition behind this investment is the speculation that the commodity will increase in value from the purchase price. Investors can buy or sell these contracts at most brokerage firms and usually need to complete paperwork acknowledging their familiarity before beginning to trade.
Trading contracts can be opportune for the experienced investor because contracts have more liquidity than bouillon and don’t include management fees.
Although frequently less convenient than other forms of investing, gold can offer important advantages to specific investors, including security, hedging against risk, and gains for those who know how to manage it. Please contact us to discuss if gold is a good investment for you.
- How to Invest in Gold: An Investor’s Guide
- Gold Standard
- Want to Buy Gold? Here’s What You Should Know
- The Royal Mint
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