Having stood against the test of time, gold has been interwoven into society as a unique asset of wealth and value. Today, it has become an essential piece of a diversified investment portfolio and is widely considered as an efective wealth preservation tool especially during adverse and uncertain market conditions.
In this article, we will explore the purpose of gold throughout its history and further breakdown on why the precious metal has retained its relevance for investors and the man on the street in this modern era – apart from its obvious shimmer and shine that is.
Gold throughout the ages
Some may say that gold – or other precious metal for that fact – has no intrinsic value whatsoever other than that of psychological attachment. Unlike a stock of company, there are no business models or financial statements available to assess the value of gold. So why is demand for the royal metal still evident? To understand this, one may need to first look back on how gold came into the trading picture.
In the olden days, trades were facilitated using the Barter system. However merchants at that point, needed to create a standardised and easily transferable medium that would simplify trades. Given that gold jewelleries were already widely recognised and accepted in trade exchanges, the creation of gold coins (alongside silver) seemed to be the answer.
There are also several other reasons which supported the usage of gold as currency. Being less reactive, gold is able to withstand corrosion over time which enables long- term store of value. The atoms in gold are also heavier than the other metal elements which somewhat invokes a sense of security and value. More importantly, it was abundant enough to allow commerce, but also sufciently rare that not everyone can produce them – thus making it a logical choice.
Following the inception of gold as a medium to buy and sell, its influence continued to grow. The Gold Standard was later on implemented by several countries such as the likes of Great Britain and the United States – where the value of currency is directly linked to gold prices. This lasted till the early 1900s when the Fiat system was ultimately integrated as the global monetary system that we see today – in which the currency or paper money used, are backed by the full faith and credit of the government that issues it.
While gold has undoubtedly engraved its importance throughout most parts of history books, and has efectively seen the rise and fall of empires and nations – its value have lasted through it all. Which brings us to our next point.
Gold as a safe haven investment
Here’s one piece of conventional investing advice that we’re often told – in times of panic, gold is a safe haven. Now, why so?
History, again, has shown us no shortage of power struggles, political coups and even the collapse of economies and currencies. During such periods, investors who held onto gold were able to successfully protect their wealth; more so than others at the very least.
Although it may be unlikely to see turmoil of such scale at this age, there is still a looming risk that economies and currencies may pullback especially in an environment where geopolitical tensions and uncertainties are on the rise. As such, when markets do hint on a certain kind of uneasiness, investors will typically flock to gold as a safe haven investment.
Preservation of wealth through gold
The scarcity of gold as well as its difculty to be mined and produced has allowed itself to be considered a highly valuable commodity even in today’s economy. In other words, gold’s value has very much been preserved through the eras. However, the same cannot be said for the paper money that we use today.
As we know it, the purchasing power of currencies has been eroded by inflation over the years, but the value of gold was not. Here’s an example, an ounce of gold is equivalent to about USD35 in the early 1970s. Both the gold and money would be able to aford you the same things then – let’s say a month’s worth of groceries for instance. Now fast forward to the present. If you convert the ounce of gold for today’s price, it would still be able to buy you the same amount of grocery (and more). However, the USD35 would not be able to do same today.
Pop quiz! So is gold a must add into your portfolio? Well, there are no right answers. In our opinion however, yes. Regardless of whether your concerns lie in rising inflationary pressures or preserving your wealth, having some exposure into gold may serve as a protection to your investments.
In addition, if your focus is to build a diversified portfolio, allocation for gold should definitely be on the cards for consideration given its inverse correlation to stocks and several other asset classes. But that’s a story for next week. So stay tuned!
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