Who buys into gold and why?
If you are not familiar with gold as an investment, it might seem a bit bizarre that people invest in lumps of metal for financial reasons! We have listed some of the reasons why people choose to buy physical gold below.
1) Store of Value
Gold is one of the oldest currencies in the world. If you look at the purchasing power of gold over time, you will see an ounce of gold will purchase roughly the same now as it did 300 years ago. Conversely, if you look at the purchasing power of some major national currencies over the same period, you will find that the buying power of these currencies has severely decreased. The reasoning behind this is that paper money is not a true reflection of wealth. You may have healthy savings in a particular currency, but if that currency becomes devalued, your wealth would no longer have the same purchasing power it once did, owing to inflation. Many people who invest in gold do so believing that it is the only way to hold their savings in a safe manner.
Another popular reason people invest in physical gold is to diversify their investment portfolio and limit their exposure to unforeseen financial dangers. This can be successful as gold tends to react very differently to a lot of mainstream, more modern investments such as equities, property and bonds. Gold is traditionally viewed as a â€˜safe haven in hard timesâ€™, and as such tends to rise when financial market related investments perform poorly. This type of negative correlation is effective for limiting damage to your investments, as it acts as a form of insurance. For example, if your stocks had significantly decreased in value, it is quite likely that your gold investment would increase in value over the same time period.
3) Security in tough times
You may have noticed that the more frequently the word â€˜recessionâ€™ is mentioned in the newspapers, the more articles on gold investment appear! This emanates from gold being seen as a â€˜safe havenâ€™ investment, as it is usually one of the few markets that increase in an underperforming economy.
4) Portability/Worldwide value
A great advantage of gold is that it gives you portable wealth which you can exchange for goods and services around the world, avoiding dependency on a single currency. As gold has a high density and a high value, it does not take up much space and can be easily transported in relatively small amounts, in the form of gold coins or gold bars. It has a universally recognised value and can be exchanged for a cash value in many places around the world.