Riikka Niemi | 23.05.2023
Investing in gold
Central banks hold more than 35,000 metric tons of gold, about a fifth of all the gold ever mined. But what is it about gold that has made it such a key asset for so long?
History illustrates that gold is a timeless asset, not only proving to be a successful preserver of wealth, but high gold prices and record demand has ensured it has outperformed most other forms of investment in a long run.
Investors have always been aware of the importance of gold as part of a well-balanced portfolio. As gold is produced in very limited quantities, it boasts a residual value that other assets and securities cannot, and therefore investors holding gold are confident that even in the worst of times, their investment will still be worth something. Therefore, most economists and market professionals view gold as a long-term portfolio diversifier and potential hedge against inflation.
It seems that many investors are moving funds into gold rather than cash, especially during the times of high inflation, while they wait for opportunities in equity and bond markets to emerge as and when the global economy gets back on its feet. It indicates, that in addition to offering diversification, gold is a world-renowned safe haven for investors, offering the insurance and protection against turbulent economic times. Gold typically acts as a ‘safe haven’ asset during times of crisis because it tends not to move the same way as equities and bonds. This means that the price of gold may be less affected by movements in other asset classes, which can help to reduce overall portfolio risk.
At present, central banks and multilateral financial institutions are responsible for holding almost one-fifth of the world’s supply of above-ground gold.
Gold is not only a safe haven during economic crisis
There is a clear demand for gold at the moment, and therefore the asset is not just something investors should turn to during periods of economic turmoil. There are other factors that drive its market price — such as central banks buying, and a growing demand on jewellery market in India and China – meaning gold can be a useful diversifier in an investment portfolio at all times – not only during economic crisis.
As gold carries no credit or counterparty risks, it serves as a trusted reserve of assets, making it one of the most crucial investments worldwide, alongside government bonds.
However, it is important to keep in mind that investing in gold, just like in other assets, isn’t without a risk, and it may not always provide a positive return. The price of gold can be affected by a variety of factors, including economic conditions, political events, changes in legislation, or investor sentiment.
What are the potential risks of investing in gold?
There are several potential risks to investing in gold, including:
- Price volatility: the price of gold can be volatile, and it may fluctuate significantly over short periods of time. This can make it difficult to predict its value and can make it a risky investment.
- Inflation risk: even though investors buy gold as a hedge against inflation, but there is no guarantee that the price of gold will increase along with the rate of inflation.
- Political risk: gold prices can be affected by political events, such as wars and changes in government policies, or legislation.
- Storage and insurance costs: if you physically own gold, you will need to store it safely and insure it against loss or damage. These costs can add to the overall cost of your investment.
- Increase in operating costs: if you own shares of gold mining companies, the increasing operating costs might affect the company’s profits and financial results.
It’s always necessary, to carefully consider the risks of any investment before making a decision.
Investing in gold without physically holding it?
There are several options for investing in gold without physically holding it, but the most common ones are:
- Stocks of gold mining companies
- Mutual funds or exchange-traded funds (ETFs) that invest in gold
Gold Preserves Wealth
While the world of investing has changed a lot during the decades, the reasons for holding the golden asset have changed little. The reasons for gold’s importance in the modern economy still centre on the fact that it has successfully preserved wealth throughout thousands of generations. The same, however, can’t be said about paper-denominated currencies.