Investors can invest in gold through exchange-traded funds (ETFs), buying shares in gold miners and related companies, and buying a physical product. These investors have as many reasons to invest in the metal as they have methods to make those investments.
Some argue that gold is a barbaric relic that no longer possesses the monetary qualities of the past. In a modern economic environment, paper money is the money of choice. They claim that the only benefit of gold is that it is a material used in jewelry. At the other end of the spectrum are those who assert that gold is an asset with various intrinsic qualities that make it unique and necessary for investors to own in their portfolios.
Dining keys
- Goldbugs have often encouraged investors to hold the precious metal as part of a diversified long-term investment portfolio.
- Gold is seen as a hedge against inflation and a store of value through thick and thin.
- Owning gold, however, comes with unique costs and risks, and data shows that gold has historically disappointed on several of its purported virtues.
A brief history of gold
To fully understand the purpose of gold, we must look back to the beginning of the gold market. While the history of gold began in 2000 B.C. B.C., when the ancient Egyptians began to form jewelry, only in 560 B.C. BC gold began to act as a currency. At that time, merchants wanted to create a standardized and easily transferable form of money that would simplify trade. Creating a gold coin stamped with a seal seemed to be the answer, as gold jewelry was already widely accepted and recognized in different corners of the earth.
After the advent of gold as money, its importance continued to grow throughout Europe and Britain, with relics from the Greek and Roman empires prominently displayed in museums around the world, and Britain developing its own currency based on the metals in 775.
The pound (symbolizing a pound of sterling silver), shillings and pence were based on the amount of gold (or silver) it represented. Eventually, gold symbolized wealth throughout Europe, Asia, Africa, and the Americas.
US bimetallic standard
The US government continued this gold tradition by establishing a bimetallic standard in 1792. The bimetallic standard simply stated that every unit of US currency had to be backed by either gold or silver. For example, one US dollar was equivalent to 24.75 grains of gold. In other words, the coins that were used as money simply represented the gold (or silver) that was currently deposited in the bank.
But this gold standard didn’t last forever. In the 1900s, there were several key events that eventually led to the passing of gold from the monetary system. In 1913, the Federal Reserve was created and began issuing promissory notes (the current version of our paper money) that could be redeemed for gold on demand. The Reserve Gold Act of 1934 gave the US government title to all gold coins in circulation and ended the minting of new gold coins. In short, this act began to establish the idea that gold or gold coins were no longer needed to serve as money. The US abandoned the gold standard in 1971 when its currency ceased to be backed by gold.
The reason gold benefits from a falling US dollar is that gold is priced in US dollars globally. There are two reasons for this relationship. First, investors looking to buy gold (i.e. central banks) must sell their US dollars to effect this transaction. This is sending the US dollar lower as global investors look to diversify away from the greenback. The second reason has to do with the fact that a weaker dollar makes gold cheaper for investors holding other currencies. This results in higher demand from investors holding currencies that appreciate against the US dollar.
