For over 5000 years, gold has been used as a store of value. Its purchasing power has been relatively stable over this period of time. This means that if consumers today paid for goods and services in gold coins, the price of goods and services would be much like that of 50 or 100 years ago. This is one of the characteristics that has made gold very appealing to investors. It will be a fact if one is to say that at any time throughout history, 1 ounce of gold buys relatively the same quantity of a specified commodity. On the contrary, some people have argued that gold is not a good investment.
Those who are opposed to gold as a good investment have simply argued that gold is not an investment, rather it is money. As Financier J.P. Morgan put it, gold is money, and nothing else. If one was to observe the appreciation of gold over the last 10 years, you will realize that it has remained the same. The volatility in price of gold over this period is not influenced by the market’s demand and supply of gold. The volatility is derived from central banks and policies that any central bank is applying in any one year as opposed to another central bank. The main reason why gold is money over the last 10 years is simply because central banks debase their currency relative to gold.
Further, there are myths about gold. Examples include; gold is a bad investment, gold is not a good inflation hedge, it is a risky investment, gold does not pay dividends or interest, gold has no monetary role in the modern society and that stocks of mining companies are better investments than gold. It is unfortunate that people misunderstand gold based on the myths. Most gold investors experience low portfolio returns because old myths about gold are still prevalent hence gold is still undervalued in today’s modern society.
But even with the above myths, gold is the world’s only true value of wealth. Today, the store of wealth is gold. Throughout our history, the supply of gold is relatively constant. However, its demand has increased hence its price has fluctuated. At no one point has its value decreased hence it’s a good store for value. I know in recent years we have seen a devalue of gold, but this is temporary and if you look at the gold price charts in the long term, you can see the metal is on the incline.
A good example is that in ancient Babylon, an ounce of gold bought 350 loaves of bread. Similarly today, the same amount of gold can purchase 607 loaves of bread. This example supports buyer’s views that gold maintains its value over time.
For investors, portfolio diversification minimizes overall risk and volatility while securing wealth. Gold is good for portfolio diversification since it is negatively correlated to stocks and other financial instruments. Historically, when investments in gold are great, stocks perform poorly and the opposite is true. Furthermore, gold is a hedge against inflation because its prices rise relative to rise in the cost of living. Recently the price of gold experienced major movements due to crisis in the European Union. With the current rise in geopolitical tensions, gold will serve as a crisis commodity and it should outperform other investments.