What is a Gold Investment?
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What is the Definition of Gold Investment?
Gold has been a longstanding option for investors to safeguard their wealth, especially in periods of uncertainty.
Historically, gold was a medium of exchange and once backed the entire monetary system in numerous countries, including Britain and the U.S. (i.e. the “gold standard”).
Gold no longer plays a central role in the global monetary system yet remains a symbol of wealth and a valuable precious metal (i.e. “collectible”) because of its following properties:
- Diversification: Gold is not correlated to the equities and bond markets – in fact, the price of gold is considered to move inverse to that of traditional asset classes.
- Inflation Protection: The price of gold, at least in theory, is said to grow in line with the inflation rate over time.
- Currency Debasement Hedge: If a country’s currency is at risk of collapse, gold could be an escape for the country’s residents from the erosion of their home currency’s value.
- “Safe Haven” in Recession: Gold prices typically rise when the outlook on the economy is negative, and investors fear a recession is on the horizon.
- Fixed Supply: Unlike the money supply, the total gold supply in circulation is capped (and counterfeits are very difficult), which helps stabilize the price as a result of scarcity.
Interestingly, gold was formerly a monetary asset (i.e. financial value) but is now viewed as a valuable commodity, as seen by its prevalence in premium jewelry (e.g. watches, necklaces, rings), electronics, and medals for awards.
Is Gold a Good Investment?
In times of market volatility and uncertainty, the demand (and price) of gold increases as investors view it as a secure asset class.
Investors often allocate more capital towards gold as an alternative to stocks and bonds, especially if a market free-fall is anticipated.
Hypothetically, even if the entire economy or government were to collapse, gold would retain some economic value because of its unique physical properties, scarcity, and durability.
But the same cannot be said about stocks and bonds, which can easily be wiped out and become worthless (i.e. bankruptcy, default).
Gold has a proven track record of value preservation and has historically been relied upon as a hedge against periods of high inflation and global recessions.
Since the price of gold is independent of the factors that affect the performance of traditional asset classes (e.g. public equities, bonds), it is the asset of choice for investors seeking to diversify their portfolios.