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Stocks and bonds are some of the most popular assets that people can invest in. Cash, sometimes real estate, and sometimes cash are also options. There are mutual funds for all these asset classes. This is where the gold comes in. Gold was historically used only to protect against inflation and in times of global economic crisis. The 1970’s marked the last time gold experienced a substantial price rise. This period was marked for high inflation, high levels of debt and turmoil around the world.
It is generally thought that gold is a metal that is used for ornaments and jewelry. However, this is only part of the picture. These uses are a way to classify gold based on what it actually does and not what is represented. Why gold is used for economic events or hedge inflation is because it is money. For proof, consider the fact that central banks are among the largest purchasers of gold. They are not making jewelry with gold, but using it to backstop their currencies. They are net buyers, after being net sellers for many years. The central bankers might not be interested if gold is no longer considered a currency.
One of the oldest currencies in the history commerce is gold. Gold was used in many cultures as a symbol of wealth. This idea is still valid today. However it has been obscured due to the fact that the US dollars is now a representative, or reserve currency, for that wealth. You are familiar with the term “gold standard”. The “gold standard” was once an international currency exchange rate that allowed all currencies to be converted at a fixed rate to gold. This was the basis currency of the world. All currencies other than gold, like the pound and the yen and dollar, were then compared with the value of the precious metal. Only recently was gold compared to the US dollar. This was because the US government held sufficient gold to justify the representative value. This is akin to saying that the US dollars was a receipt that represented real money stored in a vault. When the US dollar was removed as a gold standard currency, the receipt had no gold backing. Instead, the US’s treasury has the power to tax people and generate value. This is where the dollar’s worth comes from. It was an implicit assumption that the government would create the currency it represents. The national deficit and debt were not as large at the time when the gold standard was dismantled. The current debt is so large that government bankruptcy is possible.
What does this have do with your investing? Not like any other industrial material, but more like a currency. Similar to other currencies and how many Euros you are able to buy with your dollars, the price of gold will change every day. This is one of the reasons why gold is so volatile. It also comes with risks just like any other investment. What are the factors that would influence the gold’s value? There are many factors. But the key factor to understanding the gold market price is its purchasing power. A currency’s value is proportional to its counterparts. The way to see gold is: How much of it do you have relative to the currencies around the world? It is important to remember that all of the currencies are based on trust. You can issue currencies in any quantity you want. While gold production is increasing each year, this is still a relatively slow process compared to the issuances of other currencies.
I’m a good listener. How can I make an investment?
The metal is what I have been referring too. There are many ways to invest gold, such as gold stocks, the gold indices, or buying it directly. Gold bullion (bars and wafers), coins, and physical metals can all be purchased through dealers or funds. It is easy to understand that gold is a currency and that you should buy gold.
The fund must closely follow the price of gold in order to allow you to access it. It is possible for the fund to have small differences with the gold price. This could be due to fees or short term trading patterns. But, in the end, the difference will usually balance out. An exchange traded fund which imitates gold is one option, while another option is a trust that buys and holds the gold. There are two ways to buy gold. If they sell physical gold, these dealers would be either a gold bullion seller or a metal coin dealer. Many dealers have appeared in the recent years. You should ensure they have a track record and a good reputation. The risks of purchasing gold bullion lie in the location it is stored and the potential for loss or theft. You can keep gold safe at your bank, or you can have someone store it on your behalf for a fee. However you should be careful about who you trust with gold. The cost of buying gold can be high so it is important to shop around.
Shares can be used to invest gold. Companies that are capable of producing gold will give you the opportunity to profit from a high price or a shortage of supply due more demand. This means that gold explorers as well as small minors will not serve the purpose, unless the company is also investing in gold. Due to market factors like company management and reserves, issuing new share, expenses, company expenses, etc., the risks of purchasing a stock in gold are higher than those in gold bullion.
You can also buy shares in a mutual funds of gold shares. This strategy can be very similar to buying individual shares. But you can diversify through more gold companies. The downside is that management fees for mutual funds are often higher than those charged by buying stocks.