Gold, as part of a well-diversified portfolio.
G.R. Krahmer
The History of Gold
Gold was first discovered more than 5,000 years ago in the form of shiny yellow gold nuggets. It was probably one of the first metals found by humanity. Even though gold was not directly used as a means of payment, does not mean that little value was attached to it. Owning gold and having power often went hand in hand. The first gold jewelry was found in the Tomb of Djer, a king around the year 2500 BC. And in Tutankhamen’s tomb the largest collection of gold and jewelry in the world was found.
Even in the last 200 years, America has had the Gold Rush, where people immigrated to all over to look for gold. Over the years, people have owned gold for various reasons. It is the metal we fall back on when other means of payment no longer work. This means that it has always held a certain value, even if only as insurance in times of trouble. Since the discovery of the first gold nugget until now, not much has actually changed. Gold still has a certain appeal to people today.
Below you will find 6 reasons to invest in gold.
1. The weakness of currency
Even though the US dollar is one of the most important currencies in the world, when the value of the dollar falls against other currencies, you see that people want to seek the safety of gold. Which in turn causes the gold price to rise. The price of gold has almost tripled since the late 1990s until 2008. It’s nice that if the dollar or euro collapses, you can still have some kind of safety net with gold.
2. Protection against inflation
Gold has historically been a good safety net against inflation because the price of gold tends to rise as the cost of living increases. Over the last 50 years, we usually see the gold price rise sharply, and the stock market fall, when there are years of high inflation. This is because fiat currencies, such as the euro and the dollar, lose their purchasing power. In addition, gold is seen as an investment that retains its value well, which is why people are happy to invest in it if they think that their local currency will become less valuable.
3. Protection against deflation
Deflation occurs at a time when prices are falling, business activity is declining, and the economy has accumulated too much debt. We have not seen times like this since ‘The Great Depression’ in the 1930s. During this economic crisis, the purchasing power of gold rose by leaps and bounds, while other prices fell to the bottom. This was because people chose to save cash, and the safest way to hold cash at the time was through gold and gold coins.
4. Political uncertainty
Gold retains value not only in times of economic crisis, but also when there is political uncertainty. At times like this, you see that an investment in gold often performs better than other investments. The gold price is expected to rise when confidence in governments is low.
5. Diversification
The key to good diversification is to find a number of uncorrelated investments. Gold has often had a negative correlation with stocks and other asset classes. When times of trouble arise, you will see that people often buy gold. As a result, the gold price will rise, while another category in your portfolio, such as shares, will fall. This gives you the opportunity to rebalance, because when the gold price is high, you can sell your gold and buy a less performing category with it.
Biggest Declines in the S&P 500 – Gold
| Gold price during crises |
| Sep 21, 1976–Mar 6, 1978 | -19.40% | 53.80% |
| Nov 28, 1980–Aug 12, 1982 | -27.10% | -46.00% |
| Aug 25, 1987–Dec 4, 1987 | -33.50% | 6.20% |
| Jul 16, 1990–Oct 11, 1990 | -19.90% | 6.80% |
| Jul 17, 1998–Aug 31, 1998 | -19.30% | -5.00% |
| Mar 27, 2000–Oct 9, 2002 | -49.00% | 12.40% |
| Oct 9, 2007–Mar 9, 2009 | -56.80% | 25.50% |
| May 10, 2011–Oct 3, 2011 | -19.00% | 9.40% |
6. Growing demand for gold
The growth of emerging markets in recent years has increased their demand for gold. In many of these countries, gold is linked to culture. If you look at China, for example, you see that the demand for gold is high, also because it is more normal to save in gold there. Next comes India as one of the countries with the highest demand for gold. You see that the greatest demand for gold comes around October, which is the wedding season there. But more and more people are also investing in gold. Many now see gold as an essential part of a well-diversified investment portfolio.
How can you buy gold?
If you also believe that gold should be an important part of a good diversification, it is also nice if you have some options to purchase it. Below are 3 more ways to buy gold.
- A physical gold ETF such as the iShares Physical Gold. You can buy these from most brokers. Pay particular attention to the costs and whether they are physical, so that you know that you can include gold in your portfolio at a good price. For example, you can, just like us, put a fixed amount into a chosen gold ETF every month.
- Buy gold at GoldRepublic, savings plan or one time
Some people prefer real physical gold. Goldrepublic has the option to set up a plan from €50 per month, so that you can purchase gold every month. If you wish, you can have this gold delivered to your home, or you can have it safely stored in the GoldRepublic vault. Whenever you need it, you can get it. - Buy gold at a jeweler or gold dealer.
The last option we give is to go to a physical store yourself to buy gold or gold jewelry.
Conclusion
Gold should be an important part of a well-diversified investment portfolio. The price of gold often rises when stocks and bonds fall. The gold price can be very volatile in the short term, but has always retained its value over the long term. Gold has been known over the years as a hedge against inflation. When major currencies are struggling, you often see people buying gold.
Investors with good diversification therefore often combine gold with shares and bonds in a portfolio. They do this to reduce risk and lower volatility. It is therefore smart to consider including some gold as an investment in your investment portfolio.
