Gold as an Investment

For thousands of years and across many cultures, gold has been respected for its rich history and value. Coins containing gold date back as far as 800 BC and only 300 years later the first pure gold coin was struck during the reign of King Croesus of Lydia. It is evident that people throughout the ages kept gold for a multitude of reasons, but we will tell you why you need to keep gold today.

A History of Holding its Value

Gold has maintained its value throughout the ages.  Unlike paper currency or other assets, gold remains a solid means to preserve wealth and to create a legacy to pass onto future generations.

Weakness of the U.S. Dollar

The fluctuating U.S. Dollar, being one of the world’s most important reserve currencies, has caused many to reach for the security that gold offers.  This raises gold prices.  In fact, the price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012, hitting around the $1800-$1900 mark. The decline in the U.S. dollar occurred for a number of reasons, including the country's large budget and trade deficits and a large increase in the money supply.

Inflation

Gold has proven over time to be an excellent barrier against inflation.  When cost of living increases, so does the value of gold.  Since World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979 and 1980 (as of 2012). During those five years, the average real return on the Dow Jones Industrial Average was -12.33%, compared to 130.4% for gold. The Dow Jones index is a barometer for the rest of the world due to its size and extent of influence on companies worldwide.

Deflation

Deflation is a decrease in the general price level of goods and services. During this time the economy is burdened with excessive debt.  During the Great Depression of the 1930s, gold’s purchasing power climbed while other prices dropped severely.

Geopolitical Uncertainty

Gold preserves its value in uncertain times, even during geopolitical uncertainty. It is often called the "crisis commodity," because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments.
It has been noticed that gold’s price raises the most when the confidence in a government is at a low state. For example, gold prices experienced some major price movements this year in response to the crisis occurring in the European Union.

Supply Constraints

Much of the supply of gold in the market since the 1990s has come from sales of gold bullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. At the same time, production of new gold from mines had been declining since 2000. Annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 a rebound in production with output hitting nearly 2,700 metric tons in 2011. It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices.

Increasing Demand

The demand for gold has been boosted by emerging market economies in previous years.  Gold is intertwined into the culture in many of these countries. India being one of the largest gold-consuming nations in the world shows an increase in demand for gold every year during their wedding season. In China, where gold bars are a traditional form of saving, the demand for gold has been steadfast.

Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, SPDR Gold Trust became one of the largest ETFs in the U.S., as well as one of the world's largest holders of gold bullion in 2008, only four years after its inception.

Bottom Line

Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment crucial to any portfolio needing protection from an economic implosion.