Why to invest in gold

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Why to invest in gold

As the barter system evolved, a system of currency became necessary. For a variety of reasons, gold was best suited to perform this function. Should the current financial system of currency (paper and electronic money) cease to be function, gold will re-assert its role as the arbiter of value.

Gold’s Value During Crises

Throughout the relatively recent past, gold has experienced some bull runs during tough times, and many of the conditions that existed during those times are present today. However, recent trends are not needed to prove gold’s ability to be a strong investment in a weak economy. During the Great Depression, gold was one of the most solid investments. What’s perhaps even more startling is that gold investments quickly soared in value when the Depression was in its worst years, and then actually started to fall as the United States recovered.

Gold’s Value as Currency

For a variety of reasons, one of which being the difficulty of quickly exchanging perishable goods, a permanent currency will always be needed to replace a pure bartering system. This currency would need to be rare and unique enough that most people would not quit their jobs to find it or reproduce it. It needed to be non-perishable and durable. Finally, it needed to be recognizable as having some kind of value all on its own. Gold, along with other precious metals that can be used to produce jewelry, has all of the required attributes to assume value of currency and did so for much of the world for hundreds of years.

Could Gold Soar?

Gold will almost certainly become the currency of the world again if the current financial system collapses. Gold still possess all the traits needed to serve as a currency in a barter economy, and what’s more, investors already recognize it as valuable. Gold is not linked with any particular company or government, so its value can never be completely extinguished. The only way gold’s value could completely diminish is if it lost one of its aforementioned special properties that make it fit for currency. If a scientific breakthrough suddenly realized the “lead into gold” dream of alchemy, that would effectively destroy Gold’s value. Such a scenario, while technically feasible, it is unlikely to occur on a massive scale at any point in the near future.

Due to the nature of the bartering system, any reversion to it would require a new kind of currency. Gold had the qualities required to serve as this currency in the past and it would continue to have those properties in a future crisis. Gold’s spikes in value during economic uncertainty are evidence attesting to this theory. This makes gold a potentially solid investment in a bear market.

How to Invest in Gold for the Future

Gold has always been seen a good investment. It is a permanent currency, it is non-perishable and durable and its value has always been recognized especially in times of economic turmoil, such as during the great depression.

Now more than ever in today’s financial crisis, many are investing in gold as a safe option.

Is Gold a Good Investment? Where can it be Purchased?

  • Different governments across the world have issued gold bullion coins, which range from 1/20, 1/10, ¼, ½ and 1 ounce in weight, for example, the South African Krugerrand, USA American Eagles, Australian Gold Nugget Coins and Canadian Maple Leaf Coins. Those who want to invest in gold should not confuse gold coins with commemorative coins, which have a different value attached to them.
  • Gold Bars can be purchased in different weights and sizes, ranging from one gram to a small bar that weighs less than 1000g. There are approximately 26 different countries which produce more than 400 different types of standard gold bars.
  • Gold Based Mutual Funds – This is a collective investment scheme that pools money from many investors and invests it into gold stocks. The fund is managed by a professional. There are many brokerages and financial institutions through which one can buy gold based mutual funds.
  • Exchange Traded Funds (EFT) – This is perhaps the safest method of buying and owning shares, by investing in shares in a fund base solely on the existing market price of gold.
  • Gold Futures and Options – This is a risky but potentially lucrative method of investing in gold. A futures contract is a legal contract that binds the investor to purchasing a fixed amount of gold at a pre-determined price in the future. One can benefit from a drop in the price of gold by selling short.
  • Gold Jewelry – Purchasing gold jewelry is a major method of saving and investing in gold in developing economies.

How Much Should Be Invested in Gold?

Remembering that gold is historically volatile, the value has not always kept up with inflation and gold does not pay interest or income, most experts recommend putting only a small portion of an investment portfolio into gold:

  • AboutGoldGoins recommends 15 to 25% of one’s portfolio.
  • USA Today suggests “5% or so” of one’s portfolio should be invested in gold.
  • Money Girl simply suggests “do not go overboard”.
  • The World Gold Council advises investors to buy a little at a time and accumulate gold over the long-term.

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