Gold has been a well-regarded store of value for as long as humanity has cared about the value of things. But is it too quaint and old-fashioned to be a sensible part of your investment portfolio in the modern era? Let’s take a look at gold, what it offers, and why you might invest in it—or not.
Background
Gold is a precious metal with some applications in electronics and jewelry. It’s also used to mint some coins, though gold currency is much less common these days than in the pre-modern era. People like investing in gold mainly because it’s pretty, though. That might sound a bit silly, but it’s true!
But Why is it Valuable?
Gold is scarce, doesn’t rust, and has historically been seen as a symbol of wealth. It might sound odd, but gold is valuable now because it’s been valuable in the past. There’s something ineffable about it that people just like! In more practical terms, though, it’s popular as a store of value.
Store of Value
Central banks around the world like to target around 2% inflation annually. There are a variety of reasons why this is a good thing, but the main takeaway is that inflation is a constant. Money in your account today won’t have the same purchasing power a year from now. That means you need to find a way to store your money’s value if you intend to hold on to it for a long time.
Gold and Inflation
When inflation is hot, it’s a good idea to invest in gold. This is because gold seems to resist inflationary pressure very well. A bar of gold purchased 200 years ago for a few dollars is still a bar of gold today—and it’s worth a good bit more than a few bucks. Again, gold’s lack of rust and seemingly endless luster make it a preferred store of long-term wealth for a lot of people.
Should You Just Buy Gold?
If you’re thinking about just buying up literal gold bullion, I appreciate your enthusiasm but would encourage you to look into ETFs first. ETFs, or exchange-traded funds, are assets you can buy that give your money exposure to specific products or shares. Without getting too in the weeds, ETFs are like stocks in that they fluctuate in value.
Gold Mining Stocks
You could also theoretically buy stocks in companies that mine gold. This can be a bit volatile, though, as mining companies experience somewhat inconsistent revenue. Gold ETFs, instead, aim to mirror the current value of literal gold bullion. While both asset types would give you exposure to gold’s market value, ETFs are considered “safer.”
What Makes Gold’s Value Increase?
When inflation is red-hot, gold becomes a popular investment. This can theoretically increase its value as the market corrects for investor expectations. Somewhat paradoxically, when the Federal Reserve cuts interest rates, it can lead to higher gold values, as the market expects inflation to heat up when interest rates shrink.
Uncertainty in Fiat Money
While the US dollar is considered a very stable currency, gold can jump in value regionally if people in a specific area mistrust their government’s fiat currency. This is particularly prevalent in times of crisis, such as conflicts or natural disasters. Basically, investors assume that gold will hold its value even if the value of their nation’s currency becomes 0.
So, Is Gold Going Up?
The Fed has signaled its intention to cut interest rates after encouraging readings regarding inflation in the US. If past gold performance holds, this could result in the price of gold bullion increasing as investors hedge against potential inflation. As such, now could be a good time to diversify into gold ETFs.
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Diversification
Remember, the healthiest investing portfolios are the ones that are the most diversified. You want to have exposure to multiple sectors of the market without opening yourself up to particularly narrow losses. A rising tide lifts all boats, and a savvy investment into gold now could help your portfolio enjoy that tide.
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