Gold has been an attractive investment to millions of people for many years and there are few investments as heavily advertised as gold.
Gold is a dense, soft, shiny metal and is very malleable, hence easily shaped into bars as well as ornaments and jewelry. Pure gold is bright yellow, has an attractive luster, and does not oxidize in air or water.
Gold has been widely used throughout the world as a vehicle for monetary exchange, using gold coins or gold-convertible paper instruments. Some countries use gold standards in which the total value of issued money is represented in a store of gold reserves i.e., “the gold standard”.
A gold standard is using the gold held by a nation’s central bank as a store of value and as a guarantee to redeem promises to pay depositors, note holders (e.g., paper money), or trading peers, or to secure a currency.
The United States departed from the gold standard in 1971, as the Vietnam War required the printing of currency beyond the backing amount of gold held by the U.S. This brought to an end the gold standard or pegging the amount of currency in circulation to the amount of gold gold in its central bank.
The British had, after the Second World War, also crashed out of the gold standard for the same reason i.e., it was bankrupt, having sold most its gold to pay for the war.
Many have advocated the return to a gold standard of fixing currency to the gold a country owns, as a means of reducing inflation and fiscal discipline. However, few countries now adhere to that standard and there is virtually no chance of the world’s largest economy – the United States – of returing to the gold standard.
Gold as an Investment
Today, the major interest people have in gold is as an investment. There are many firms who advertise gold heavily as a hedge against economic uncertainty of all kinds and also due to its purported feature of rising faster than inflation.
Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises. These crises include market declines, growing national debt, currency failure, inflation, war and social unrest.
Adherents to this view point out that between 1970 to 2010, the value of the Dow Jones Industrial Average rose by 1,280%.
However, the price of gold rose by 3,792% – from $37/oz to $1,410/oz. By that standard, it drubbed the stock market.
As investors consider gold however, they must remember that with investments, what goes up can also come down and that gold has had periods in its history when its value has dropped.
How Can You Buy Gold?
The first way of investing in gold is simply to buy some the stuff. This may be in the form of gold coins or gold bars. It is also the least convenient and least safe method, but if you do so, a safe deposit box is a much surer bet than your home.
An investor may also purchase gold exchange-traded products that are traded like shares on the major stock exchanges. Gold ETPs are an easy way to gain exposure to the gold price, without the inconvenience of storing physical bars.
However these instruments, even those which hold physical gold for the benefit of the investor, carry risks beyond those inherent in the precious metal itself. They are very complex and have been widely criticized for this reason.
Next, an investor may buy bank-issued gold certificates, allowing them to avoid the risks and costs associated with the transfer and storage of physical bullion.
These certificates may be backed by specific bars of gold or not and the customer is exposed to more risk if it the latter is the case and there is a run on the bank.
Other gold investment vehicles include “gold accounts” (again issued by banks), derivatives, and shares in mining companies. The last option is not an investment in gold, but recognizes that profits of the gold mining company could rise, increasing its share value.
Finally, the investor might invest in gold through gold-focused mutual funds, which invest in many of the previous vehicles and perhaps spread the risk of investing in gold better than one individual might.
As always, before you invest in gold or other investment discussed here, discuss with your financial adviser.