Is Gold an Asset?
Gold has always been a sign of wealth and high status, and although it doesn’t have many uses apart from its value, it’s the most popular precious metal at the moment. The reason for that is its store value and how important it has been for all kinds of civilizations.
In modern times, people see gold as an alternative asset class investors get when they need a hedge against inflation and economic uncertainty. It can also help with portfolio diversification if you don’t want to be exposed to traditional stocks and bonds.
This precious metal doesn’t generate additional dividends or income, unlike the assets mentioned before. Knowing that, why do people keep getting it? Is gold an asset? What makes it different from others? You will find all the answers you need on this page.
Gold As a Strategic Asset
The Role of Gold in Long-Term Investment
Being patient is one of the keys to becoming a good investors because gold can be along-term investment just the same as other assets. Gold plays a key role in how investors perceive this type of investment and what they do with it. The reason for that is its liquidity, ability to retain value over time, and how it promotes portfolio diversification.
Physical precious metals such as gold are excellent if you need a safety net for emergencies. However, you need to keep yourself from selling it. Investors don’t get gold to generate additional income but to feel safe investing in other global stocks and asset classes.
Gold’s Safe-Haven Status During Economic Uncertainty
In times of economic uncertainty, most asset classes in the stock market suddenly lose their value, which makes people worldwide lose a lot of money. Gold investing can help you avoid that problem. When other assets go down, gold prices increase or stay stable, so many financial experts buy gold when they predict there will be a financial crisis in the future.
Historically, gold has performed well in crises, and that includes wars and recessions. That makes it a reliable asset with a high investment grade.
Gold As a Hedge Against Inflation
Inflation often happens when there is not an adequate balance between the supply and demand of an asset. This financial phenomenon decreases the value of assets and causes market volatility. However, gold prices increase with inflation, so investors buy it to then sell it, as it’s a highly liquid asset.
One of the reasons for this is that there is not an infinite amount of gold in the world. The relative scarcity of precious metals has made them keep a stable price across time.
Gold’s Mainstay Allocation in a Diversified Portfolio
In a nutshell, people try to get diversified portfolios because of their benefits, stability, and potential long-term returns. Not all investors try gold, but it’s part of most portfolio strategies for people looking forward to protecting their wealth.
Gold and Portfolio Diversification
We’ve been talking about how precious metals – and gold specifically – help with portfolio diversification, but why is this like that? It comes from the fact that gold has little to no correlation with other asset classes.
You would lose a lot of money if you only had one mutual fund or type of asset in your portfolio. On the other hand, gold is a liquid asset that doesn’t lose its price often due to its relative scarcity. If you want to protect your wealth, the first step is to buy gold.
Gold and Portfolio Stability
Similar to what happens with other precious metals, what often makes people buy gold is not only its price but how much people trust its past performance. People lose a lot of money in financial crises because they don’t know what to do and start selling everything they have and making reckless financial moves.
People who focus on gold investing feel confident in the price stability of the asset and think things thoroughly. However, if you don’t know what to do with your portfolio in emergencies, you should hire a financial advisor.
Gold and Risk Management
Portfolio Diversification with Gold
As we mentioned before, although people can use other precious metals, gold is often the best choice for managing investment risk through portfolio diversity. The reason for that is its rareness, past performance, and historical importance.
The Concept of Asset Diversification
Asset diversification is the action of investing in several asset classes to reduce the investment risk in your portfolio. That includes assets, such as gold bars, other metals, bonds, stocks, or other commodities. Diversifying your portfolio doesn’t mean you will be 100% safe from market volatility and economic downturns, but you will be a bit safer.
It’s best for people looking forward to diversifying their portfolios to hire a financial advisor to tell them what the future performance of the assets they want to invest in might be. A liquid asset, such as a precious metal, for example, is excellent for emergencies, while stocks perform poorly in recessions.
Gold’s Role in Diversification
Gold performs well in diversified portfolios because of its historical value and ability to be a hedge against inflation. Regardless of the world problems going on at the moment, analyzing gold’s past performance tells us that investing in it offers decent long-term results. Precious metals have similar benefits but don’t give you the same advantages as gold investing.
Managing Market Downturns with Gold
When you invest in gold, you get a new way to invest in market downturns. Your financial advisor won’t recommend investing all your money in gold, but you should at least buy some of it to diversify it. Remember that physical gold keeps its value in times of economic uncertainty, which is something other commodities don’t give you.
Gold During Financial Crises
There are many examples of gold being a safe investment for financial crises. You have the 2008 financial crisis when the price of gold rose, so many investors started buying it more than stocks and bonds to store their wealth.
The same happened during the Covid-19 pandemic. In 2020, the global economy was close to one of its lowest points, the price of gold decreased for a time, but it got to its average value in the same year.
Gold and Recession
When recessions happen, central banks often change interest rates and try programs to improve the economy. The problem with those policies is that, even if they solve the problem at hand, they can lead to inflation. As you know, precious metals such as gold perform excellently when used against inflation, so they are a good option for recessions.
Stock prices often decline when there are recessions, too. Since gold has a low correlation with it, the diversification benefits it offers can also make it easier for investors to store their wealth and survive the recession without losing a lot of money.
Gold’s Low Correlation to Other Assets and Alternatives
As we have mentioned on this page, unlike other precious metals, gold has a low correlation to other assets and alternatives. That is one of its greatest advantages and what makes it so attractive for people trying to diversify their portfolio. However, that also means all its market movements are independent and won’t be positively affected by other assets.
Gold vs. Stocks and Bonds
Precious metals, stocks, and bonds have unique features that include different benefits and risks. Gold, for example, is a safe-haven asset, and its historical value makes it an excellent option for inflation and economic uncertainty. However, it doesn’t create new sources of income or dividends.
Stocks don’t perform that well when a financial crisis happens but offer potential growth and income thanks to the dividends they create. Generally, investing in stocks is more dangerous than doing so with bonds or gold since their value depends on the performance of the company and the current market conditions. Nonetheless, its returns can be high.
As for bonds, they are a less risky alternative to gold or stocks for investors but offer less returns. They also work for portfolio diversification though gold is still an overall better choice.
Gold vs. Real Estate and Cryptocurrency
While other factors that affect stocks and bonds can change the price of other metals, what makes gold different is that it doesn’t have any relation to most of them. However, it’s important to consider things such as supply and demand, geopolitical events, and current economic conditions to predict the future results you may have after investing in gold.
Although real estate is a tangible asset as well, it offers different benefits to gold. It gives you income and potential appreciation over time, but market fluctuations are one of its greatest risks. People also need to watch out for property management issues and maintenance costs.
Crypto is completely different from real estate and gold because it doesn’t have a physical form. This digital currency offers high returns but is one of the most volatile assets on the market.
The three options are good for different things. People looking forward to storing their wealth and surviving financial crises should always pick gold. Nonetheless, if you want something that generates additional income, go for crypto or real estate.
Capital Appreciation and Gold’s Potential
Historical Long-Term Returns of Gold
You’ve read excellent things about gold throughout this article, but what results has this asset gotten over the years? Remember when we said you had to be patient to be a good investor? The value growth gold has had in the last two decades has been outstanding.
It had a 62% value increase in the past five years and a 392% in the last two decades. People who invested in gold 20 years ago have gotten a 398% growth of their initial investment.
Gold’s Performance Over the Years
The past performance of gold only shows that it will keep being a decent investment for investors of all kinds, and that’s not something new for experts on the matter. Gold had an average return of 7.7% from 1971 to 2020 according to the World Gold Council.
There are many examples like that, such as the increase in value it held from 1971 to 1980, or when it rose from around 35$ per ounce to $800 per ounce in roughly 11 years. Why did that happen? Because of the high inflation rates in the country due to the geopolitical problems going on around that period.
Although it has suffered some changes, the price of gold has stayed stable in the last two decades, and it doesn’t look like it will change too much. Nonetheless, while other assets suffer a value decrease or increase due to market fluctuations, gold changes due to external factors, so it’s difficult to know if it will have any sudden change in the mid or long-term.
Gold’s Price Fluctuations
Gold has remained stable in the last few years, but there have been a few important fluctuations due to global events, such as the 2020 pandemic. When COVID came, the price of gold dropped since most investors started selling their assets as an emergency measure. Regardless of that, gold prices rose again later in the same year.
Interest rates can also make the price of gold go higher, as it makes it look like a more attractive investment. Why? Because it doesn’t generate additional dividends or income, so you don’t need to adapt to expensive interest rates or fees. However, gold investors should always watch out for storage and other costs related to storing physical gold.
Gold’s Positive Risk-Adjusted Returns
You need to evaluate the risks involved in any investment you make, and gold is not an exception. When we talk about risk-adjusted returns, we mean investments that measure the level of risk you went through to make them and give the whole financial move a specific value depending on how risky it was and how much money you got at the end of the day.
Measuring Risk-Adjusted Returns
The Sharpe ratio is one of the most common measures of risk-adjusted returns, and it measures the excess return of an investment per unit of volatility. Some people also use the Sortino ratio.
Gold’s Risk-Adjusted Performance
Gold has offered risk-adjusted returns throughout history, especially in times of economic uncertainty and market volatility. That has made it over-perform other asset classes such as bonds and stocks. The 2008 financial crisis is a great example of that.
Preserving Wealth with Gold
Gold’s Deep Liquidity
Gold is a highly liquid asset, which makes it easy for people to get money for an emergency by selling physical bars. That also makes it a tradeable asset.
Understanding Liquidity in Investments
Liquidity refers to how easy it is to sell or buy an asset. That affects the asset’s market price since it directly determines the purpose investors follow when getting it.
Trading and Selling Gold
Since gold is one of the most liquid assets in the world, you can trade and sell it through a wide variety of channels and forms. People can sell physical bars, gold futures, ETFs, and even gold mining stocks.
Gold As a Historical Store of Value
Gold has been a historical store of value for decades since countries and people have used it to store their wealth feeling safe it won’t lose its worth. There are more assets to invest in each year, but gold stays as a decent option for anyone trying to fight inflation.
The Concept of Store of Value
The concept of a store of value talks about assets you can save, retrieve, or exchange in the future without changing their expected value.
Gold’s Intrinsic Value
Apart from all the factors we considered on this page, the truth is that gold has always had an intrinsic value since people first found it. Ancient civilizations such as the Egyptians and Greeks used it for kings and pharaohs to show status. This asset is durable and rare, which makes it difficult to alter or replicate since it has a level of cultural relevance other assets don’t have.
Practical Considerations of Owning Gold
Before investing in gold via IRA, let’s look at some aspects that you should take into consideration.
Costs Associated with Owning Physical Gold
Buying gold is expensive, but dealer premiums, shipping fees, and taxes may take a lot from you, so you need to consider them before getting anything.
Buying and Selling Costs
The costs for making a gold investment depend on the dealer you buy the asset from. While some offer storage services for free, others make you pay for it. The same happens with shipping and dealer fees and taxes.
Storage and Insurance Costs
You can’t store gold at home, so you need to pay for storage fees to keep it safe and insurance costs to make sure you can get help in case something happens. It’s better to invest in an expensive storage-based dealer than getting all your gold robbed in a few weeks.
Volatility and Risks of Owning Gold
Apart from the costs of owning gold, there are other risks to it, too. If you don’t pay for a good storage place, you could lose your investment. Besides that, its price can go down due to political events.
Price Volatility in the Gold Market
Apart from global events, changes in the supply and demand of gold can change how profitable the investment may be. Among other precious metals, gold is one of the most volatile options on the market in the short term.
Political and Economic Risks
Owning gold can represent political and economic risks, too. Let’s say you own gold and store it in a safe place. It may be difficult to access or sell your gold if there is an economic downturn in your country. Governments can also impose restrictions on the ownership and sale of gold at any time.
Benefits of Gold During Troubled Economic Times
Due to all the benefits it offers, and how valuable it generally is, gold can be an excellent investment in troubled economic times. Here are a few examples of it:
Gold As a Safe Haven Asset
Since gold keeps its value over time, you can use it as an emergency fund. The safety of gold IRAs lies in the fact that you can feel security while investing in other things because you always have a safeguarding net that keeps you from losing all your money.
Gold As a Hedge Against Inflation
Not only does gold keep its value over time but also increases it when other assets go down. That makes it perfect for people living in countries prone to suffering from inflation.
Gold for the Long Term
The Future of Gold as an Asset
Many people are scared because they don’t know if gold will be a decent investment in the long run. It has stayed as the most important precious metal and all the benefits it offers. Let’s not forget that gold is a tangible asset as well so you can consider it a worth-investing asset, and that won’t change in the future.
Predicting Gold Prices
Predicting gold prices is difficult due to all the factors you need to consider to do it. The most important ones are geopolitical events, supply and demand, and economic conditions. Nonetheless, the interconnected nature of the global economy makes it too difficult to predict even for investors making a technical analysis or a fundamental analysis to get insights into future market trends.
Future Market Trends for Gold
There are a few future market trends that investors should think about before investing in gold. We are talking about central bank policies, advances in mining techniques, the development of gold substitutes, and the impact of the supply and demand of the asset. Environmental concerns are a threat to the mining industry, so it can have a negative impact on gold’s price in the future.
Factors Influencing Gold’s Value in the Long Term
Many factors can influence the price of gold in the long run, and although it was difficult to study them decades ago, we now have a wide array of examples that tell us how the asset will perform in specific circumstances. Things, such as global economic conditions, supply and demand dynamics, and other geopolitical events are the main causes of gold price variations, whether it’s to go higher or lower.
Global Economic Factors
Global economic phenomena are essential to determine how much gold prices will increase or decrease in the future. The first is inflation since one of the main benefits of gold is that it’s a hedge against it. Interest rates, economic growth, and currency values are also something you should take into account when making a gold investment.
Gold Supply and Demand
The supply and demand of an asset directly change its value, but what makes those factors increase or decrease? As for gold, the first thing you need to consider is mine production. Gold will be more expensive if mine production declines, as there will be less available for purchase.
Central bank policies around the world hold a lot of gold as part of the country’s reserves. Modifying those policies is a major change in how people manage assets in bulk. Jewelry demand comes from fashion, and that can also alter the supply and demand for gold.
Frequently Asked Questions
Is Gold a Good Investment?
If you are looking forward to diversifying your portfolio, gold is a good investment. You need to see this asset as something you will only keep to stay safe from market fluctuations or as a safety fund for emergencies.
How Does Gold Compare to Other Types of Assets and Precious Metals?
Gold is different from other precious metals due to the high demand there is for it worldwide. That comes from the historical value it has and how well it has worked over the years. The jewelry industry has also made gold more relevant than other precious metals.
As for other assets, it’s difficult to compare them to gold since they don’t serve the same purpose. Stocks and real estate are assets that help you generate more income, which is something gold investors are not directly interested in.
What Are the Risks Associated with Owning Gold As an Asset and a Precious Metal?
Although gold is an excellent investment, it brings a few risks with it. The main problem with investing in gold – and precious metals in general – is that you can lose money from storage costs and capital taxes. Besides that, sudden global events can make its price go down.
How Does Gold Investing Serve As a Hedge Against Inflation?
The reason gold serves as a hedge against inflation is that its price often goes up when the price of other assets decreases. Since what inflation does is make the price of things increase and the opposite for currencies, owning gold is a good way of keeping your money safe.
What Are the Costs Associated with Owning Physical Gold?
When you buy physical gold, you will need to pay storage costs to keep it safe, since you can’t store it yourself. It’s also important to take shipping fees and sales markup into account.
Conclusion
You don’t buy gold to generate more income but rather use it as a strategic investment resource. It’s excellent for storing your wealth, having a safety net for emergencies, and diversifying your portfolio.
Regardless of that, investors need to invest in other assets apart from gold if they want to get a truly diversified portfolio. Financial advisors can help a lot with that. Besides that, they must keep themselves from selling the asset unless it’s a true emergency. If you want to know more about the matter, visit our website now.
