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Gold is a precious metal that has attracted investors for thousands of years. Its rarity, beauty and strength give it an enduring appeal, but investors are also drawn to its relatively constant and intrinsic value over long periods. It’s seen as a ‘bedrock’ asset that you can rely on in times of volatility. But how do you know if it is right for you to invest in? Let’s start with the basics…
Gold is a chemical element that takes the form of a soft, yellow metal. It is durable and resistant to most acids while also being malleable. These qualities mean it is greatly in demand in dentistry and the electronics industry, while its rarity value – all the gold ever mined would fit into a detached suburban house – means there’s an enduring demand for gold jewellery. But gold is perhaps best-known as an investment.
Why is gold considered an attractive investment?
The reason gold remains attractive to investors is the way it holds its value over long periods of time. One ounce of gold today buys about the same number of loaves of bread as it did during the reign of King Nebuchadnezzar 2,500 years ago – which gives you an idea of just how inflation-proof gold is. It is the number-one ‘safe haven’ investment in times of trouble.
Gold Bugs (investors who are big fans of gold) rate it because it’s the only monetary asset that is no-one’s liability. Unlike currencies, gold’s value doesn’t depend on someone else’s promise to pay – it is valuable in itself.
For this reason, gold is often described as the ‘asset of last resort’. A financial or other disaster could destroy the value of all major national currencies, but gold would remain universally acceptable instead as a payment for goods and services.
But remember, like all investing, an asset’s value can go down as well as up. The gold price has ebbed and flowed a lot over those two and a half millennia, sometimes quite dramatically. Also, unlike the dividends paid on shares and bonds, gold does not produce any income. For holders of physical gold, it may even generate costs in the form of security and insurance. Plus, the long-term trend seems to be for central banks to wind down their bullion holdings, which is likely to depress the price.
Who should include gold in their portfolio?
- Those seeking diversification. Because gold is a monetary asset in its own right it doesn’t move in tandem with the stock and bond markets. The gold price follows its own rhythms. So it’s a good additional variant to your standard portfolio of stocks and bonds.
- Anyone looking for commodity exposure. Like other natural resources, such as tin or copper, gold is mined and transported in a market that can be profitably studied and understood by the experienced commodity investor.
- Those wishing to anchor their portfolio by putting a portion of their funds into the bedrock asset that many believe gold to be.
- Day traders, keen to profit from short-term price movements. Gold contracts for difference (CFDs) are eminently suitable for this purpose once someone has got the hang of the market.
What determines the price of gold?
The price of gold has swung about markedly since the turn of the Millennium, hitting a low of $272 per ounce and a high of $1,664. But these are extremes. Recently it has tended to trade in a range of $1,150 to $1,350. You can easily find the gold rate today in newspapers and online.
There are 3 big factors that impact the price of gold:
- The extent of inflation or deflation in the global economy. Inflation (when prices of goods and services are going up) makes money less valuable in relation to gold, so gold prices tend to be high. Deflation (when the prices of goods and services are going down) has the opposite effect, so the value of money increases in relation to gold and gold prices come down.
- The state of the world economy and international relations. Gold is seen as a safe-haven asset in times of trouble and uncertainty, so prices rise as demand increases. When there’s relative prosperity and tranquility this bears down on the price as demand falls away. This was seen from the late 1980s well into the current century.
- How attractive it is compared with other investments. At a time of low returns on shares and bonds, gold can attract investors seeking better yields. The reverse is also the case.
Other factors also have an impact. Central banks are big players in the bullion market and should they sell some of their reserves, as happened at the end of the 1990s, it can send the gold price right down. If they increase their gold reserves, it can give the price a lift.
Like any other asset that’s bought and sold, the frequent movements in price create opportunities to make a profit if you can sell for more than you paid. But there is something a bit special about deciding to buy gold.
Why is gold priced in dollars
Across the world, gold is priced in US Dollars (USD) to the Troy ounce, a throwback to the post-war era when the dollar was tied to gold and all major currencies were, in turn, tied to the dollar. That means that if you’re investing in another currency, you’ll have to make an extra calculation to figure out how the price works for you.