Since long before the time of the ancient pharaohs to the dawn of our super-modern digital technocracy, the history of the world has been built around the acquisition of a bright yellow metal. Many people argue that it is simply a misappropriated fascination that keeps the dream of gold alive and that this metal doesn’t have the same value as it once did.
An argument to support this claim is that very few of us will actually achieve any amount of wealth in gold and most will be working and living by paper and digital cash today. Does this mean that gold has lost its value in the wake of digital currencies and super-modern financial technology?
According to the experts, this is not the case.
In the following article we will take a closer look at why an investment in gold is one of the most important components of any investment portfolio even today.
Why do investors buy gold?
Inflation hedging
One of the most common reasons that investors will buy gold is the capacity gold has to protect accumulated wealth from an unpredictable economy. The smartest investors in the world today will accumulate their wealth and transfer the value into solid gold to protect against social unrest and inflation. This works because gold has the tendency to rise with the cost of living. This is one of the primary reasons that gold can reduce the risks that frequently threaten an investors portfolio.
So, if currency begins to lose value because of inflation, the value of gold begins to rise. If the investor had their wealth in paper money, the value would drop with inflation, but value in gold increases. This means the investor with gold assets in their portfolio would have successfully protected their wealth from the danger of inflation. This is referred to as “hedging”.
Relative performance
The price of gold will also fluctuate with the economy, but in the long term it will perform far better than most other types of assets that can be accumulated. Unlike stocks and bonds, the returns from gold are based on price appreciation. There are other considerations the gold investor must factor into their financial plans, for example how it will be insured and stored. This is important when considering adding gold to an investment portfolio.
Diversification
Another important reason that investors will buy gold is that gold isn’t affected in the same way that other assets are affected in the stock market. Which is a good reason to maintain a portion of your funds in gold. This is called diversifying.
Diversification is an important part of any investment plan. Basically, this means that wealth is spread across a variety of different types of assets. This follows the wisdom of the old adage that cautions the investor against “putting all the eggs in one basket”. If the value of some of the assets drops, the stability of the other assets will protect against a total loss.
Finally, a word of caution, even with golds assets diversification is important. Just because it is known for performing well, the prices of gold can drop, and they will. If all the gold hoarders decide to suddenly sell their cache of gold, the prices of gold will plummet and take any over-invested portfolios with them.
