Gold is a bulwark against inflationary pressures. Even though many economists have predicted that current inflation is a temporary phenomenon that would end sooner rather than later, the economic trend seems to indicate otherwise. Indeed, most of these analysts have chosen to remain silent in the face of continuing price increases in fuel, food, and services.
More and more people are looking for alternatives such as gold and other precious metals, given their performance in recent months.
In recent years gold has lost ground as one of the preferred options of a large number of investors, mainly due to the advancement of modern options like cryptocurrencies. The reality is that gold has remained a powerful safe haven asset for thousands of years, and it looks like this trend will continue for quite some time.
Is gold a good investment?
There are a variety of reasons to consider gold as a good investment option, both now and in the future. Not just in regards to its historical standing as a store of value and generator of income during times of crisis, but also because gold is an asset with real value that tends to hold its ground no matter the economic, political, or environmental status of the real world surrounding it.
The price of gold throughout the years
Over the years, gold prices have been influenced by different events and geopolitical scenarios that have led to this precious metal being seen as the preferred option to preserve wealth for many investors.
In 1944, during the time of the Bretton Woods Agreement, the price of gold was fixed at $35 an ounce. With the end of this era and the decoupling of gold from the US dollar gold begin to rise in value. Other determining historical events such as the world oil crisis as a result of the OPEC embargo, the Gulf War at the end of the 70s, and the consequent inflation above 15% in the US, caused gold prices to began to rise quickly to above $100 per ounce.
This price increase remained constant and reached an all-time high of $850 per ounce in the early 1980s, only to begin to decline in price as the global economy stabilized. Indeed, by the year 2001, thanks to the sustained decline in the inflation rate and the growing interest of investors in the quick gains that they could obtain from the stock market, the price of gold dropped significantly to settle at $256 per ounce.
Since then it has grown significantly, and after the financial crisis of 2008, gold would start another remarkable bullish run that would end up establishing a new all-time high of $1,900 per ounce in 2011, to then decline again and start another bullish run from 2016 to settle in a new maximum of $2,000 per ounce in 2020, mainly due to various geopolitical factors and the crisis caused by the COVID-19 pandemic.
Currently, due to recent world events, the price of gold has managed to establish itself solidly at around $1,900 per ounce and could continue to rise.
Why invest in gold?
If you have observed the history of gold markets, you can deduce an indubitable fact; gold has always been considered a safe haven value in periods of economic uncertainty, moments when its price begins to rise steadily. But there are other benefits to investing in gold and precious metals that are worth taking a closer look:
- Provides liquidity – In a similar way to what happens with currencies such as the US dollar, the liquidity and universality of gold have no rival. Indeed, you can easily exchange gold for cash anywhere in the world.
- Retains its value – Most economists consider that the price of gold is not indicative of its real value; that is, even if the price decreases, its underlying value does not change that much, since gold is a limited resource that is considered a commodity that can be put to real use in different areas.
- Protects against inflation – In periods of inflation, the value of gold increases. Since gold is priced in dollars, any deterioration in the value of this currency will lead to a higher gold price. That’s why, during times of high inflation, gold offers a more stable investment.
- Solid diversification – Adding different assets to your investment portfolio is a key activity to reduce overall risk. Additionally, gold often moves inversely to stock and currency values, which provides a fairly effective form of diversification.
- Universally accepted asset – Since gold is considered a universal commodity, it isn’t subject to the political chaos of any specific country, something that affects other assets such as currency futures, treasury bills and other similar securities.
- Gold is an industrial commodity – Gold is used in the manufacture of various products, including jewelry and electronics, so there is a constant demand that gives stability to the gold price. Also, in times of high demand, these markets can force the price of gold to rise.
Despite all the forecasts of the technology gurus against gold, in times of great economic and geopolitical instability such as the one we are currently experiencing due to the Russian invasion of Ukraine, gold remains the quintessential safe haven asset. You should take into account that in January 2022, just before the war started, gold had a price of $1,802.40 and just one day before the conflict broke out, the price rose by 6%, to settle at $1,910.40
Now, it’s important to note that making accurate calculations on the price of an asset in such unstable conditions is very difficult, since anything could happen that can influence prices. Even so, there are good analytic predictors that indicate the price of gold will continue to rise. Indeed, on sites such as Wallet Investor and Long Forecast, they estimate that the price of gold could close 2022 easily exceeding the $2,000 barrier.
But even Blackstone and Goldman Sachs have a bullish forecast and calculate that gold could exceed $2,100 and $2,500 throughout 2022 respectively, all under the premise that investors will continue to look to gold as a guarantor of security and a hedge against inflation, even as cryptocurrencies and other similar assets continue to grow.
But, is it better to invest in gold or silver?
Both gold and silver are investment options that protect against inflation, but they don’t work in the same way. That’s the reason why it’s important that you understand the key differences between each metal, so that you can determine with greater certainty which of the two assets would be a better option in your investment portfolio.
Gold offers more stability
Silver is much more volatile and sensitive to supply and demand. Although this may be a magnet for those who want to use this volatility to make consistent and much larger profits in the long term when trading, this also carries a greater risk of losses.
Gold is a better tool to diversify
In the long term, gold works much better as an asset to diversify an investment portfolio mainly due to a very low or even zero correlation with other types of assets, such as stocks, bonds, etc. The main reason for this is that gold has a much more limited industrial use than silver, so it is less sensitive to economic changes.
Silver has a greater practical use
Silver has a greater use in different industries, especially those linked to electronics. Approximately 50% of the silver that is produced is used in the manufacture of electronic devices such as computers, tablets and smartphones, but it is also widely used in the automotive industry and in the production of alternative energies.
This implies that the price of silver is more tied to changes in the economy than gold, and is therefore more affected by growth and demand in the industry.
Silver rises more in periods of inflation
It is a fact that both gold and silver provide good returns during periods of inflation. This is because both metals are valued in dollars, so if the dollar loses value, gold and silver rise because demand increases from those who use other currencies. Also, being in higher demand in the industry, silver tends to rise more than gold during these periods of high inflation.
What are the benefits of investing in precious metals?
The stock market is a tempting investment option, but it is good to diversify instead of putting all your eggs in one basket. In reality, the stock market is not convenient at all, especially for people who want to use their retirement funds or IRA funds to invest; if something goes wrong in the stock market – as it has happened before – they could end up losing all their money.
For this reason, many investors like to diversify their portfolio to reduce the risk in case of eventualities and precious metals like gold and silver, have always been a safe bet. Here are some of the reasons for this:
- Precious metals tend to retain their value
Unlike fiat currencies, which lose value over time for a variety of reasons, precious metals tend to hold their value consistently; what you could buy 100 years ago with a certain amount of gold, you can buy it today with almost the same amount. The most valued precious metals today are gold, silver, platinum, and palladium.
- Precious metals Have little or no correlation with other assets
A large number of assets are highly sensitive to the possibility of a market downturn. Good examples of this are stocks and more recently, cryptocurrencies. This doesn’t happen with precious metals, which are considered to be in constant demand, so falls in other markets do not usually affect their prices.
- Precious metals give full control of your assets
Although it is possible to use third-party services to store your precious metals or even invest in mining companies, you can also store your assets physically at home without worrying about legal problems. In fact, depending on the country you are in, only metal purchases above a certain amount need to be declared. For the US, you should only declare purchases over $600 in gold and silver.
- Precious metals have great liquidity
No matter which country in the world you are in, you can always use your gold or silver as universally accepted currencies to pay for goods and services, or simply exchange it for fiat currency. This doesn’t happen with cryptocurrencies for example; although their acceptance has increased worldwide, their high volatility still keeps them far from the acceptance level of precious metals.
How to invest in gold and other precious metals?
There are two basic forms of investment in precious metals:
1. Buy the physical metal
You can buy precious metals in physical form in different presentations, which can include bars, coins, or even jewelry made from these metals – especially gold, silver, and platinum – and keep them at home or by using private vault services for this purpose. You can use these savings as a store of value or wait for their price to rise in the market to make a profit.
2. Investment products
There are a number of precious metal-based investment products that you can use for convenience in case you don’t want to physically hold your metals. These investment products can include shares of mining companies, exchange-traded funds (ETFs), royalty or streaming companies, mutual funds or future contracts, and use them as mechanisms to generate profits when the price of metals rises.
Golden words of encouragment
Based on what you have read in this article, there are two possibilities: you are sure you want to invest in gold and other precious metals, or you are not sure if this is the right time to do so.
If you are in the second group of people, let it be known that the right time to invest in gold is “anytime.” Gold has been and continues to be the quintessential store of value to protect against inflation.
However, it is important that you carefully analyze what your short and long-term goals are and that you consult a professional for advice on the advantages and risks for your particular case. And remember, never invest the money you need to live.