For thousands of years, people have used gold as a way to store and transfer wealth. It’s known and used around the world and was once even used as security for paper money. But what are its benefits and returns, and is gold a good investment? Read on to find out!
The History of Gold as Currency and Asset
Gold as a currency has an extensive history. Initially, gold nuggets were used as the currency of choice, and it’s said that the first gold coins were minted around 600 BC in ancient Lydia. Back then, it was a mix of gold and silver, but soon after that, in the 5th century BC, real gold coins were created.
Over time, more and more kingdoms used gold or silver as a base for their currency. Nowadays, we have more than 2,500 years of gold history to look back on. As time went on and ‘paper money’ became more popular in the 19th century, the gold standard was developed.
This meant that paper money had a gold backing, and one could exchange the paper for real gold at any time – providing trust in the paper. Many countries adopted the gold standard, and when the Bretton Woods system came into place in 1944, the US Dollar became the ‘go-to’ currency able to be exchanged for gold. In turn, this created fixed international exchange rates.
Soon after that, the gold standard was abandoned and now there is no country left that still has a gold backing.
The Pros and Cons of Gold
Pros
- Doesn’t decay
- Globally recognized
- Not only used in speculation but also used in industry
Cons
- Need storage space
- Physically heavy
- Limited natural resource
Gold as an Investment – What Returns to Expect?
These days, gold has had a resurgence as an asset to invest in. This is due to some of gold’s characteristics as an asset, which we will go into detail about in the following section. For now, let’s look at the development of the gold price and its average returns.
The gold price is usually quoted in troy ounces, where 1 oz equates to 31,103 grams. When looking at the profitability of an asset, it’s common practice to look at its historical performance. Although this does not allow predictions for the future, it lends itself to understanding correlations between the gold price and certain global events.
On January 31st 1973, the price for an ounce of gold stood at 66.00 USD/oz; a few days ago, on June 6th 2022, it was a whopping 1839.35 USD/oz. That’s 27.87 times as much, or an increase of 2,787%. What does this break down to over almost 50 years, though? The interest rate was 6.98% over this timespan – not too shabby!
Looking over the last 20 years, from June 20th 2002 to June 6th 2022, the interest rate was 9.10%. So, looking just at these numbers, it doesn’t look too bad. One has to keep in mind some potential deductions depending on how you buy and sell your gold investment – more on that later.
Asset Characteristics of Gold
There are specific characteristics that define gold as an asset. Let’s look at some of them:
Great for diversification
Gold and other assets, such as stocks, historically have had a negative correlation with one another. This means that if the price of equities rose, the gold price dropped – and if equities fell because there was fear in the market, then people put their money into gold.
Inflation & protection
Historically, when the cost of living increased, then gold prices also rose, making the asset a good hedge against inflation. On the opposite end, when prices decreased due to deflation, gold’s purchasing power increased – because people chose it as a place to store value.
Limited supply
One reason why gold has seen such success as a currency and store of value is its limited supply. Unlike paper or digital money, gold can’t just be printed with ease, but instead has to be tediously mined from the earth’s resources – thus limiting the circulating supply.
How to Invest in Gold?
If you’re looking to invest in gold, then there are many options you could choose from, such as buying coins or even investing in gold mines.
Buy physical gold and store it at home
The most straightforward approach is to buy gold in bars or as coins and store them at home. With that method, you most likely won’t get the gold for its “spot price” but instead pay a bit more when buying and get a bit less when selling.
Pros
- Easy accessibility
- Can take care of the asset yourself
Cons
- Usually less secure than storing in a bank
- Buy with surcharge, sell with deduction
Buy physical gold and store it in a bank safe or storage facility
Another option, similar to the one above, is buying the gold and then storing it in a bank safe. You still have the price issues, but it’s generally more secure whilst remaining accessible. There’s also the option of using something like Bullionstar, where you buy the gold and it’s stored in their vaults in Singapore.
Pros
- High safety level
- Remains accessible
Cons
- Pay a premium on the price
- Extra cost for storage of gold
Invest in gold on paper
From gold certificates to gold ETFs, there are many ways to invest in “paper gold”. Often they have a tighter spread in terms of buy and sell prices compared to the spot price. The downside is that you invest in paper rather than the physical asset.
Pros
- Tighter spreads
- No need to store physical gold
- Easy to buy and sell
Cons
- No investment in “real” gold
- Brokerage account needed
Gold mine investments
Investing directly in gold mining companies has become a popular choice in recent times. This involves an investment into stocks, where you focus on the company and the underlying industry. Due to that, prices often correlate with the general stock market, instead of the gold prices.
Pros
- Investing into stocks
- Easy to invest
Cons
- Not investing in gold itself
- Correlates with stock market movements
Is Gold a Good Investment? That Depends on You!
So, the question is, “Is gold a good investment?”. Looking at the historical returns of 7%-9% per year, it’s not something to say no to. But you have to be aware that buying and selling physical gold is different from performing the same actions with stocks or P2P loans.
While you can buy it easily on the Internet or in shops, and can generally also sell it again to certain outlets, there’s a notable spread to be aware of. However, one benefit of this is that it entices long-term holding of the gold, as opposed to quickly buying and selling. Gold is also a physical asset, unlike many other investment options. Due to this and its negative correlation with the stock market, it could be an excellent option to diversify your portfolio and provide an additional hedge against inflation.