Why do people invest in gold?
The short answer to this is because of uncertainty. When prices of gas, oil, and other basic commodities rise, people get worried and run for cover. That cover is gold, which has been used for hundreds of years as hedge to inflation.
A more complicated answer to that would be because of political turmoil or liquidity issues. In 2013, Germany decided to repatriate some of its gold back from Paris and New York vaults due to, according to financial experts, liquidity issues. A lesson that all investors can learn from Germany’s decision to repatriate some of its gold is that the precious yellow metal should always be in close proximity to allow for easy liquidation. After all, there’s no point in owning gold if you can’t liquidate them immediately when you need to. Today, liquidating an ounce of gold costs around $1,300 USD. If you’re a gold investor, you may visit Bullion Vault to see today’s gold price and accurately calculate how much you’d get if you liquidate your assets.
Now, think about it this way: when prices inflate and the normal citizen can’t buy things conveniently anymore, the government tries to stimulate the economy by printing more fiat money. The problem is, when more fiat money is printed by a nation, its currency will get weaker. This is the primary reason why gold prices increase when currency declines. Inversely correlated, as investors would say.
Gold, however, is being shunned by financial markets and governments for one apparent reason: gold prices are highly volatile and cannot be controlled easily. Since they can’t control it easily, they tell people to stay away from it.
Many are saying that gold has limited uses in the present day. Bitcoin — an investment vehicle that isn’t backed by anything — is more popular than gold now. A Spanish official recently went as far as saying that gold is an unprofitable asset. Naysayers say gold shouldn’t even be a part of an investment portfolio since it’s difficult to sell in times of uncertainty. With a lot of people having these kinds of views on gold today, should investors really just forget about gold?
Don’t buy into the propaganda. As previously mentioned, many financial institutions and governments are trying to ward people off gold investments because they can’t control investors with gold. Why should they promote gold if they can’t manipulate its price shifts?
But the truth is, gold, when adjusted for inflation, would have to cost more than $2,200 per ounce to be on par with the last high in 1980 (see graph below). When the world returns to the gold standard — something Steve Forbes has claimed to be a huge possibility — gold prices could potentially climb even higher. Think of a world where gold costs more than $9,000 per ounce, as James Rickards had suggested — a figure around 8 times its current price.
Don’t be afraid to invest in gold. A 30% – 50% decline in its prices could mean many investors pull their investments from the market, but those who understand its nature and volatility shouldn’t be frightened. History shows that as long as you don’t pull out until the peak of a bullish market, you’ll more than likely prosper. And even if its prices go down by more than 50% of its original acquired price, it can still be traded in case of an economic catastrophe. In fact, it will be the only trade-able thing should stocks and currencies come to an end.