It’s no surprise that of all the precious metals gold is among the most popular as an investment. In the 5,000 years humans have used it as a form of currency it’s never failed. It’s considered among investors as one of the safest investments during times of crisis and a safe store of wealth.
Investors typically buy gold as a hedge against economic, political, or social crises. Historically, gold has been a way to preserve value as a national currency loses value. The US debt crisis is an example, as investors flocked to gold this summer amid the debt debate and subsequent lowering of the US credit rating. As the dollar loses value the price of gold goes up.
Like most commodities, the price of gold is also driven by supply and demand as well as speculation. According to the World Gold Council annual mine production of gold over the last few years has been close to 2,500 tonnes. Most of that, about 2,000 tonnes, goes into jewelry or industrial uses and around 500 tonnes goes to retail investors and exchange traded gold funds (ETFs). Because of the huge volume of gold stored above-ground, compared to what’s produced annually, demand rather than supply is usually what affects the price of gold.
Like all the precious metals gold is used as a hedge against inflation, deflation or currency devaluation. The WGC says during times of uncertainty, particularly when there is the threat of war, demand for gold rises. This is because gold is considered a solid asset that will always buy food or other necessities. During times of war people often fear that their assets may be seized or their currency may become worthless.
The most traditional way for investing in gold is buying bullion. Gold bullion coins are also popular, such as the Krugerrand which is the most common gold bullion coin. The WGC says there are 46 billion troy ounces of the Krugerrand in circulation today. Other common coins are the Austrian Philharmonic, Canadian Gold Maple Leaf, Chinese Gold Panda, British Sovereign, American Gold Eagle, and American Buffalo.
Investors consider gold to be a store of value rather than a return on value, which is how stocks are regarded. While stocks and bonds perform best in a stable political climate, according to the WGC, gold has traditionally outperformed stocks during political and economic turmoil. Consider 1980 when the gold price peaked amid the threat of the global expansion of communism when the Soviet Union invaded Afghanistan.
Today, there is no shortage of economic or political turmoil around the globe. Many investors and analysts expect gold prices to remain strong or even climb higher in the short-term or even into the long-term as long as there is uncertainty worldwide.