People have valued gold for centuries, in early civilizations, it was used as a form of currency. Today, it holds the importance of a valuable asset. Throughout this period, people have kept gold for various different reasons. It holds importance in many cultures due to its rich history. Nowadays, its economic value cannot be matched by any other form of currency.
Unlike paper currency, gold has held its value over the past century. Because people see gold as a way to pass their wealth onto the next generations, it has always held importance in the economic world. As a precious metal, the unique properties of gold are what makes it so important to people. When other forms of currency stop working or have value, it is these precious metals we fall back to.
Therefore, owning gold is still a very good idea if you want to keep your economic conditions stable. Here are 4 reasons why people invest money in gold, even today with the thousands of different currencies in existence.
- Hedge Against Inflation Or Deflation
Gold has been an excellent hedge in times of inflation or deflation. Over the past 50 years, the price of gold has soared as the cost of living seems to have risen. When compared to stock market prices, gold has never had to face fluctuation when prices increase.
This is because when regular currencies lose their purchasing power due to inflation, gold is measured in the units of these currencies, and hence its value increases as prices increase. Plus, gold is considered to have value, so whenever there’s inflation, people tend to buy gold to try and keep their economic condition afloat.
In contrast, in times of deflation, for example, the great depression, when economies were under excessive debt and prices declined, the price of gold instead increased. This was because people wanted to hoard wealth, and the safest way to do that was to invest in gold or gold coins.
- Increasing Demand
Over the past few years, the demand for gold has increased tremendously. The emerging market economies of many cultures have gold intertwined into their traditions. For example, China has a steadfast demand for gold because gold bars are considered to be a traditional form of saving, and wealth. Investment website NPMEX emphasizes the importance of having gold bars in your possession. Similarly, India has a huge demand for gold as well because of its culture.
In fact, it is the second-largest gold-consuming country in the world. Although majorly used for jewelry, the high demand for gold in India makes it a precious commodity all over the world. Investors have also begun to understand the importance of gold, and have started to extensively invest in gold bars, coins, and other forms.
- Gold Vs. The US Dollar
The US dollar is one of the world’s most important currencies and has a high exchange value. However, when the value of the US dollar falls, people tend to flock towards buying gold as a means to safeguard their money. Doing so results in an increase in the price of gold. The price of gold increased exponentially when the value of the USD declined between the years 1998 and 2008. The decline in the US dollar’s value was for a number of reasons including trade deficits, and the country’s large budget.
- Portfolio Diversity
Investors know the importance of diversifying their investment portfolio in order to reduce the risk and volatility of their investments. While there are countless investment options present in the market today including stocks, bonds, properties, cryptocurrency, etc., None of them compare to the significance of gold in an investment portfolio.
The key to diversifying your portfolio is investing in elements that are not correlated to one another so that if one of your assets is dropping, you have a backup investment to help you stay afloat.
Gold has a historically negative correlation with stocks, and always tends to react to how stocks are doing in the investment market. For example, the 1970s was a terrible time for stocks but the price of gold soared. Whereas the 1980s and 1990s saw a tremendous increase in stock prices, and the value of gold seemed to have declined.
In conclusion, gold should be an active part of your investment portfolio because it reacts instantly to the changing economic conditions of the world. It is usually a safe investment and has comparatively lower risks and volatility. Even if its price seems to decline over the short term, it always regains its market value over the long term and hence proves why it is an essential commodity to invest in.