Gold has always had an actual and symbolic importance for humans, dating back to ancient civilizations such as the Egyptians and the Incas. It has been utilized not just as money for exchange but also as a store of value, valuable jewelry, and other artifacts.
Specifically, the brilliant and metallic properties of gold, as well as its scarcity and difficulty of extraction contribute to the fact that gold is a valuable asset. So, while other precious metals have been acknowledged as solid investments for decades, gold stands out from the rest of the precious metals.
Let’s delve deeper into the specifics of this one-of-a-kind asset.
Gold's Historical Significance
It’s only natural to be curious about the discovery of Gold. While it's hard to determine the 'when,' what's interesting is that gold was the first known precious metal discovered by ancient societies in streams globally.
Quite soon after its discovery, the asset became a favorite material for early societies to create jewelry, ornamentals, and utensils — mainly because of its natural beauty, shine, and malleability.
Not only that, but gold was associated with rulers in early cultures, demonstrating its preciousness and intrinsic value to humanity.
Gold as a Currency
Since its discovery, different societies have embraced gold as money. Notably, the first gold coin dates back to roughly 1500 B.C. During this time, the ancient Egyptian empire established the yellow metal as the first formal means of exchange for international trade. They established the Shekel, an 11.3-gram coin that became the Middle East's standard measurement unit.
The Egyptians began blending alloy gold with other metals in the later ages to boost durability and add different color pigments. They employed these items to enrich their sculptures, which were created using the lost-wax casting method, which is still used by artists today. Notably, this coin-based system using gold was introduced in 1066 A.D. in New England.
Following that, in the late 13th century, Great Britain and modern-day Italy issued their first gold coins. Later, in 1787, the United States followed suit. Over time, the adoption of gold as a currency became widespread, making gold an invaluable currency. So, while paper currency is the primary form of money in the world today, governments still place a high value on gold.
In fact, the world's understanding of gold's value makes it a global medium of exchange. Its intrinsic appeal also offers a universal attraction to mankind, just as it did in ancient times.
Physical Properties of Gold
What exactly makes gold so precious? There are various reasons behind it. Ancient monarchs used to pour gold on their palaces at every turn, demonstrating how it has always been seen as a symbol of riches and power. The key factors that make gold appealing to date are its use, beauty, and scarcity.
Precisely, gold is easy to work with and imprinted into coins since it can melt over a flame and does not corrode. This, combined with gold's shiny appearance, has turned it into a symbol of immortality and status in many societies throughout history.
What's more interesting about gold is that it has a natural range of unique and appealing colors that catch the eye. This is due to gold's chemical properties. Compared to silver and other metals, gold atoms are heavier. Consequently, these atoms enable gold to absorb the blue spectrum of light while reflecting other colors. This characteristic is what imparts the distinct tint to the light that interacts with gold.
In terms of scarcity, gold has a finite supply. At the same time, being an appealing metal, gold is commonly used in multiple sectors, especially the jewelry industry. For ages now, gold accessories offer an aesthetic appeal to most people. Now, to mention how it can be molded into any jewelry design. This finite supply, along with the ever-increasing demand for gold, justifies its high value.
Gold as a Hedge Against Inflation
It's quite evident how gold has always been popular among traders. But did you know it acts as an excellent hedge during economic uncertainty? This simply means that the value of gold tends to hold during times of economic difficulty. This is because gold is seen as a safe-haven asset that investors turn to for protection during turbulent times.
But why is that? Well, gold, unlike other assets, is not linked to the performance of a specific firm, country, or currency. Instead, it is appreciated for its inherent qualities, such as scarcity, durability, and non-corrosiveness.
Gold is also known to preserve wealth when paper money loses its value. As a result, when other asset classes, such as equities and stocks, decline, gold prices tend to climb.
An example of this can be the 1970s oil crisis. Back then, the United States experienced severe inflation. However, it wasn't the same for gold. Instead, gold was seen to perform much better in the market during this period, especially compared to stocks and mutual funds.
Additionally, considering a more recent scenario of the COVID-19 epidemic, gold mining and production in nations such as South Africa were either suspended or drastically reduced. This, combined with widespread uncertainty, drove up the price of gold. These historical examples prove how gold has, and will continue to be, a great hedge against inflation.
Gold's Role in Diversifying Portfolios
Now you understand how gold has stood strong in its value and sometimes increased during times of uncertainty. But is that enough of a reason to invest in gold? Not entirely. After all, even if it maintains its value, gold investment doesn't always promise profitable returns. Yet, at the same time, if you are planning to diversify your portfolio, gold investment might save you from extreme losses, too.
This means that adding gold to your investment portfolio, along with other assets that come with a high potential of profits and losses, helps balance out your losses. For instance, let's consider the 0.4% price surge of gold in 2022 despite significant inflation. At that time, the U.S. stock market fell by around 20%. During this period, holders of stocks, as well as gold, were able to stabilize the losses that came with the fall of the stock market with the returns gold brought.
Of course, it's difficult to forecast these situations. However, this example proves that adding gold with high-risk or high-profit assets can ensure that even when certain markets collapse, you aren't entirely at a loss.
Liquidity and Universal Acceptance
Before we discuss gold's high liquidity, let's first understand what liquidity is. Precisely, the ease and speed with which an asset can be sold for cash at its present market value is referred to as liquidity. Money in a bank account, for example, is extremely liquid since it can be withdrawn at any moment. At the same time, real estate is illiquid since it takes time to list, accept an offer, and close the transaction.
Now, coming back to gold, this asset is known to be highly liquid. This is due to its ease of purchase and sale. Gold can be purchased in a variety of methods, including physical assets, jewelry, stocks, IRAs, mutual funds, and more. The best part here is that you don't have to worry about getting the fair market price because gold spot prices are transparent and easy to access.
Plus, Gold is Universally Accepted!
Yes, with its high liquidity, gold also comes with global acceptance. And why not? For thousands of years, this asset has been generally regarded as a kind of currency. It's also a valuable investment because it's used in everything from jewelry to electronics. In fact, it's valuable in every country, making it simple to acquire and sell internationally.
As a result, while the price of gold fluctuates in the short term, there are always buyers on the market in any country. So, wherever you are, you can easily sell or purchase gold without much hassle.
Demand Dynamics: Jewelry, Technology, and Central Banks
As a significant physical asset known for maintaining its position in the investment market for decades, gold's application has grown to numerous sectors today.
It covers central bank purchases of gold as well as the ever-expanding jewelry, technology, and investment sectors. But how is it used in these markets? Let's look at gold’s applications in detail.
Starting with the most common and favored use of gold, gold jewelry is the largest source of yearly gold demand per sector. Although it has dropped in recent decades, it still amounts to around half of worldwide gold demand.
This proves that gold usage in the jewelry industry is nowhere near the limit but rather increases at a steady pace. Notably, India and China are by far the largest jewelry markets, accounting for more than half of the global total.
Did you know that the electronics sector accounts for 80% of gold used in technology? Precisely, this metal is widely used in consumer electronics and automotive applications, where its chemical and physical quantities combine to make it indispensable in a wide range of high-end products. Moreover, the rise of electrification is adding to gold’s demand in the sector.
As an example, most types of semiconductor chips use gold for coating or as thin bonding wires. With the common use of semiconductor chips, the use of gold in the tech sector is consistently increasing.
Gold, as an asset class, possesses unique characteristics. Many investors allocate a portion of their investments to gold to enhance the diversification of their portfolios, thus safeguarding and potentially improving their overall performance. As previously mentioned, this allocation helps reduce portfolio volatility and minimizes losses when the market faces shocks.
Adding to it, gold is increasingly being accepted by investors of all types as a dependable, tangible, long-term store of value that has moved independently of other assets.
Demand from Central Banks
The Global Central Bank Reserves are also significant gold holders. This is mainly the result of 2008's financial crisis that produced a fundamental shift in central banks' attitudes toward gold. Eventually, it prompted a reconsideration of gold's role and importance in reserve asset management.
As a result, emerging world central banks have expanded their official gold purchases, while European banks have stopped selling. Having said that, this specific sector now accounts for a sizable portion of yearly gold demand.
Limited Supply: Mining and Scarcity
Besides the growing demand and benefits for gold, there are certain issues linked with its supply, primarily stemming from its scarcity. Now, with gold being used since the dawn of time and new mining continuously taking place, it may seem strange to imagine a day when there is no more gold to be mined from the ground. Nonetheless, gold, like every other scarce natural resource, has a finite supply on Earth.
So, there's no doubt that the world's supply of new gold will eventually run out. But when? Well, it is worth noting that new gold mining has already slowed significantly over the last two decades. In the latter half of the twentieth century, it was common to find new veins with estimated quantities of 10 million troy ounces or more.
However, in today's landscape, the discovery of large gold deposits is becoming increasingly rare. This can be attributed, in part, to reduced spending by mining corporations on exploration. But a more significant concern is the possibility that there are few, if any, substantial unexplored veins left in the world.
Speaking of which, studies now show that gold mining could become economically unsustainable by 2050. This possibility, however, could be delayed if certain gold mining issues are more broadly addressed. These issues include:
Gold is undeniably an evergreen asset, whether it be due to its aesthetic appeal, historical usage, or physical properties that add to its current demand. Hence, adding it to an investment portfolio or precious metals IRA is certainly a smart decision, especially when it comes to lowering the risk of overall investment losses.
Moreover, with the scarcity of gold along with its ever-growing demand and ever-changing economic landscape, there isn't a better time to invest in gold and preserve your wealth.
We hope this detailed article will help you make a more informed decision for solidifying your investment portfolio.