- Gold maintains its value
Looking at past performance, gold has managed to maintain its value. Since ancient times, gold has been used in tools, technology, and as a symbol of wealth and class. Even today gold is used in everyday technology from phones to space suits. People hold on to this precious metal so they can pass it on to future generations so the family can preserve its wealth and legacy.
- When the reserve currency loses its value, gold’s price holds
When the U.S. dollar decreases, the price of gold rises. Gold has been coined as a safe haven for this reason. As soon as the reserve currency drops, people start to flock to gold.
- Hedge against inflation
Over the years our spending power has dropped along with the value of each dollar due to inflation. When the cost of living increases, so does the price of gold. For example, a cup of coffee has increased 636% over 49 years. Gold, unlike paper money, cannot be printed and therefore its supply is limited. When people lose faith in the government and fiat currency, they often turn to the asset that has been consistent in value for hundreds of years, and because of this, gold is deemed the ultimate hedge against inflation.
- During deflation, golds purchasing power soars
Deflation occurs when the overall level of prices in an economy falls while purchasing power of the currency increases. This can be triggered by either too much supply and not enough demand or by a drop in the supply of money and credit. During deflation, people tend to hoard cash instead of spending it, and during the Great Depression in 1930 we saw many do this with gold since it was the safest way to do so. While markets and the economy suffered during the Great Depression, gold prices soared. This shows that investing in gold is beneficial during both inflation and deflation scenarios.
- Crisis commodity during geopolitical uncertainty
During a global crisis, people turn to safety, which is often gold. Gold has been consistent, stable, and performed when there is uncertainty. When people lose confidence in the government, they also lose confidence in the currency since it is the government that regulates it. Gold is produced and created naturally by the earth, it has no political opinions or motives, so people find comfort in owning the precious metal.
- Supply Constraints
Savvy investors like to invest in gold mining companies because it is the only industry that can guarantee to sell all of their products. However, a new gold mining production can take 5-10 years to create, which limits supply due to its long time frame. Gold production has been slowing down since 2000. Most of the gold being sold and bought over the last few years has been from stores in central bank vaults. With the supply and demand curve, the supply is currently low and the demand is high.
- Increasing Demand
Emerging economies’ booming wealth is increasing the demand for gold as well as culture. China buys gold bars as their traditional form of savings and people from India buy gold during the wedding season. President Joe Biden is launching an electric car initiative that will increase demand for precious metals like gold and investors are beginning to see the benefits of owning this precious metal as well.
The price of gold is often volatile but overtime is consistent and maintains its value. Gold prices move in response to paper assets like stocks and bonds and are therefore included in a diversified portfolio as a form of insurance. The number one rule in investing is diversification which minimizes risk over the long term. Savvy investors even diversify within metals with silver, platinum, and palladium. Allegiance Gold offers all of these precious metals and for those looking to diversify their retirement portfolio, we offer a precious metals IRA as well.