Should I be investing in gold now? What makes other investors think of putting their funds into gold investments? If these are some of the questions that you have been asking yourself, then you just landed in the right place because, by the end of this article, you will have sufficient information to help you make your decision with regards to whether you should open your gold IRA or not. Come along with me as we explore this interesting topic.
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The essence of gold in the modern economy
As much as gold does not back the U.S. dollar or any other powerful and internationally recognized currency, it still bears its importance and value in the present-day world. It still plays a very significant role in our economy.
How does gold still play an important role in the global economy if it does not back up any currency? You may ask. To this question, the one straightforward answer I can provide is: Look at the balance sheets of large financial institutions and central banks, and see how much gold they hold. Organizational such as the International Monetary Fund, which plays a major role in the state of the economy, are in possession of such a significant amount of physical gold.
According to the IMF factsheets, the IMF holds 2,841.1 metric tonnes of gold. Did you know that this organization’s gold holding increased by a cool $19.3 billion, in just 4 months after the start of the global pandemic? Such an amount is enough to pay the salaries of about 6.3 million nurses in Africa for an entire year.
Such financial institutions hold about a fifth of the global above-ground supply of gold. In addition to that, these financial organizations have been actively adding to their gold reserves. As an investor (whether a beginner or expert), such are moves that should not be taken for granted. These bodies are not simply adding gold to their reserves for the sake of it. They are aware of the long-term state of the global economy and taking precautions to ensure that they do not end up crashing along with other investors and investments.
The Role of Gold in the preservation of wealth
At this juncture, I know that you’re possibly wondering why these bodies are choosing gold over any other investment. Well, during the time that the IMF’s gold reserves were raking in billions in profits, the paper-based investments were taking a nosedive. As of March 23, 2020, the S&P index had fallen by more than 31%, and that NASDAQ had fallen by close to 25%. Large financial institutions were not the only ones converting their paper currency into gold. Other investors were also rolling over their savings into gold, to safeguard the value of their investment portfolios from rapidly declining.
Gold has in fact successfully preserved wealth throughout a number of centuries. This is something that cannot be said of paper currencies. To give you a clear understanding of what this means, let me present an example:
If in the early 1970s you had $35, you would have comfortably purchased one ounce of gold using this amount of money. Alternatively, you would have decided to keep that amount of money intact. $35 was, in the 70s, enough to get you a good business suit.
Today, one ounce of gold is well above $1600, an amount of money that can get you more than one business suit. This means that if you purchased one ounce of gold back then, you’d not have lost your wealth. Unfortunately, holding on to $35 would not have been beneficial, since $35 cannot buy you a good business suit. This is a clear case of the value of the dollar being eroded by inflation, which is a market force that’s responsible for the poor performance of a significant number of investors’ investments.
The role of gold as a hedge against the U.S Dollar
The understanding that gold is essential in the preservation of wealth is quite essential, more so during these times in which the value of the U.S. dollar is declining with the increase in inflation. Historically, gold has proven to be an efficient hedge against these two scenarios. There is more than enough evidence to prove that the value of gold increases with the rising inflation.
When most investors and financial institutions start realizing that their money is losing value, they start positioning their investments in hard assets which have been known to traditionally maintain their value. The example I presented above is just one good case of how gold can be a necessary asset to have in one’s investment portfolio.
What causes the relationship between gold and the U.S. dollar? Two main reasons exist for this relationship, which are:
- Investors who’re out to purchase gold (e.g. financial institutions like the IMF and central banks) are required to sell their U.S dollars to complete these transactions since gold is priced in U.S. dollars. Whenever they do this, they drive the U.S. dollar lower, as other global investors seek to diversify their portfolios out of the dollar.
- When the dollar weakens, most of the other investors who hold other currencies are able to purchase more gold since it becomes more affordable (since it is based on USD). This leads to there being more demand from those investors who own other currencies, that have at that time appreciated significantly, relative to the U.S. Dollar.
Should I be investing in gold now?
The truth is this is not a question to which I have a very straightforward answer. Every investor’s needs differ significantly, and this influences asset allocation. If you’re an investor who’s, however, looking for ways to safeguard your portfolio from a decline in value due to the instability of the global economy, then gold is one asset you should not miss out on having in your portfolio. Gold may not be your go-to asset if you’re looking for a quick buck in the short-term horizon ( though it has proven to gain value in a short term horizon as well), but if you’re a long-term investor who is after the steady growth of your investment portfolio, then you need this shiny metal.
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I hope that if you landed here with the question “should I be investing in gold now” in mind, that you got some information to help you make a decision. If you still need more information to weigh in on your decision, check out the recommended smart solutions above, or drop your question in the comments section.
I wish you well,
Eric, Investor and Team Member at Gold Retired!
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First of all, thank you for your comment!
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/Best