Why Invest in Gold

Simply put, gold is the ideal hedge against uncertainty. Historically, the main reason to invest in gold is to preserve value, especially as the national currency devalues or depreciates. Thus, gold investments are a hedge against a depreciating currency. Unlike other metals, gold is typically produced for accumulation. In contrast, metals such as platinum and silver are usually produced for industrial purposes. Gold is a store of value. In the past, gold was directly used as money.

Investors should have some gold in their portfolio, according to a recent research report from Trinity College. The report found that buying gold is a good hedge against declines. That’s because gold prices increase dramatically after a stock market crash, but only for about 15 days. After that, gold prices tend to lose relative value against stocks, which often rise again shortly after a crash.

The reasons involve currencies, banking, and monetary history. These are complex areas, unfamiliar to most. Everyone knows how money works on an everyday level, but most people are surprised at the way the money system works at the high-finance level. The current money system has some systematic problems and is likely to undergo great stress in the next few years. These stresses will effect the financial lives of everyone—many will lose, some will profit.

Historically, gold has been a proven method of preserving value when a national currency was losing value. If your investments are valued in a depreciating currency, allocating a portion to gold assets is similar to a financial insurance policy. In the past year, the climb in the price of gold above $800 per ounce is due to many factors, one being that the dollar is losing value.

The supply of gold is constrained, which helps gold hold its value. The gold supply increases very, very slowly as more gold is mined. Gold acts as a hedge against inflation and a store of value over time. In ancient Rome, a single one-ounce gold coin could buy a quality toga, a pair of sandals, and a belt. Today, the same is true: a single one-ounce gold coin is about $780, enough to buy a good quality suit, shoes, and a belt.

Finally, for asset allocation purposes. Gold is an excellent way to diversify your assets, as it is often negatively correlated with equities and bonds. The ideal asset allocation involves creating a mix of assets that have low to negative correlation with one another.