Gold as an investment
Investors can invest in gold through exchange-traded funds (ETFs), buying stock in gold miners and associated companies, and buying physical product. These investors have as many reasons for investing in the metal as they do methods to make those investments.
A Brief History of Gold
In order to fully understand the purpose of gold, one must look back to the start of the gold market. While gold’s history began in 3000 B.C, when the ancient Egyptians started forming jewelry, it wasn’t until 560 B.C. that gold started to act as a currency. At that time, merchants wanted to create a standardized and easily transferable Gold as an investment, form of money that would simplify trade. The creation of a gold coin stamped with a seal seemed to be the answer, as gold jewelry was already widely accepted and recognized throughout various corners of the earth.
Gold in the Modern Economy
Even though gold no longer backs the U.S. dollar (or other worldwide currencies for that matter), it still carries importance in today’s society. It is still important to the global economy. To validate this point, there is no need to look further than the balance sheets of central banks and other financial organizations, such as the International Monetary Fund. Presently, these organizations are responsible for holding approximately one-fifth of the world’s supply of above-ground gold. In addition, several central banks have added to their present gold reserves, reflecting concerns about the long-term global economy.
Gold Preserves Wealth
The reasons for gold’s importance in the modern economy. Centers on the fact that it has successfully preserved wealth throughout thousands of generations. The same, however, cannot be said about paper-denominated currencies. To put things into perspective, consider the following example:
In the early 1970s, one ounce of gold equaled $35. Let’s say that at that time, you had a choice. Either holding an ounce of gold or simply keeping the $35. They would both buy you the same things, like a brand new business suit or fancy bicycle.
However, if you had an ounce of gold today and converted it for today’s prices, it would still be enough to buy a brand new suit, but the same cannot be said for the $35.
In short, you would have lost a substantial amount of your wealth if you decided to hold the $35 as opposed to the one ounce of gold because the value of gold has increased, while the value of a dollar has been eroded by inflation.
Gold returns vs equity returns
Gold prices are negatively proportionate to equity. However, if you look at returns over the long run, equity has done better compared with gold.
But with equity being volatile in recent times, shouldn’t gold be use as a hedge? What if there is a repeat of what happened in 2008-09? Kumar says that what happened during the global financial crisis of 2008-09 is not something that will happen too often.