In the third quarter of 2020, a whopping 495 metric tons of gold were used for investment purposes, which means that more gold went into investments than the jewelry industry. This may come as a surprise, considering that cryptocurrency has seen a lot of hype lately. However, gold has several benefits that make it an ideal asset for investors looking to diversify. Anyone with a basic understanding of history and economy knows that gold has consistently held its value over millennia, making it one of the oldest, if not the oldest, forms of investment. Whether they come in the form of bullion bars, coins, jewelry, ETFs, or mutual funds, gold investments have a high demand and usually deliver a high return rate.

Here’s what makes gold an excellent asset in your portfolio, regardless of your investment strategy:

Unlike fiat currencies, gold holds its value

The oldest gold coins date back to the 5th or 6th century BC. Over the millennia, societies and economies have placed great value on gold, and that still happens today. While fiat currencies and other investment vehicles can easily depreciate, despite normal fluctuations, gold holds its value. For example, when the US dollar fell between 1998 and 2008, the price of gold nearly tripled. A famous analogy says that in 1920, you could buy a luxury suit with a gold coin. In 2020, you can still do that. No matter how many currencies rose and fell in the past hundreds or thousands of years, gold has remained a constant.

The value of gold tends to appreciate during inflation

Investors usually fear inflation because it decreases the value of cash. However, gold investments tend to thrive during periods of inflation and can act as a safety net. In fact, many investors rely on gold as an “inflation hedge.” The price of gold has increased by 50x since the 1970s, and the forecast for the next 50 years is mostly positive. Although gold faces some unforeseen competition from cryptocurrency, its value is still expected to hold up.

Gold demand is expected to rise, but the world gold supply is shrinking

In the following years, gold demand is expected to gain momentum, fueled especially by countries like India and China, whose middle class is expected to grow. For example, Indian households stocked up over 25,000 tons in 2019 – that’s more than the top six central banks combined! What’s more, demand is even higher during the wedding season and the Akshaya Tritiya festival. Gold is also used for gift-giving and, as the middle class continues to grow, so is the demand for gold. At the same time, the world’s gold supply is shrinking. Gold is a luxury asset, but it’s a finite resource. US gold reserves are dwindling, and the easy-to-mine gold supplies have already been exploited. 

There are probably many mines out there, but exploration and mining costs are rising. For example, putting a new mine into production can take anywhere from five to ten years. In this context, existing gold assets are about to become even more valuable. As every investor knows, scarcity increases value. Today, if you want to buy gold online, the process is relatively simple because there are websites where you can compare the price of gold for various vendors and then buy gold bars or coins. However, there may come a time when these luxury assets won’t be as easy to find.

Experts are already talking about “peak gold” – reaching the maximum gold mining capacity in one year. According to some experts, we may have already reached peak gold in 2018, when mining production decreased for the first time since 2008. Of course, gold won’t suddenly go away – we still have about 20% of gold to mine – but production will flatline and then slowly decrease year by year.  

Gold is a “crisis commodity”

Political instability, recessions, or, as we’ve seen more recently, global pandemics, are major crisis events that can destabilize national currencies and shake up the stock market. When confidence in Governments is low, and there are political tensions, the value of other investments tends to drop. It can go back up, in time, but generally speaking, no investor wants to see their portfolio take a big hit. However, during difficult times, the value of gold goes up – that’s why it’s often referred to as a “crisis commodity.”

Like any asset, gold prices will obviously fluctuate in the short-term but, in the long run, gold is one of the most stable investments, and if we look back at some of the biggest geopolitical crises in modern history, we’ll see that gold prices shot up, providing a safe haven for investors. Warren Buffet, who was initially against gold investments because gold “gets dug out of the ground,” now holds $564 million in a gold mining company through his investment firm, Berkshire Hathaway.

People’s tendency to turn to gold in difficult times might seem odd, but we should keep in mind that, unlike stocks, bonds, and paper money that’s printed out of nothing, gold is a tangible asset and, needless to say, it helps that it’s aesthetically pleasing.

Gold is a fantastic portfolio diversifier

When you get into investments, one of the biggest mistakes you could make is to put all your eggs in the same basket. No matter how tempting a certain asset may be (currency, stocks, bonds, etc.) if that asset’s value eventually goes down, your entire portfolio will be affected. That’s why you should diversify. The purpose of diversification is to spread out your money so that when a financial instrument underperforms, another one provides a safety net. 

Diversification is basically a way to reduce investment risks, and gold is one of the best portfolio diversifiers because it doesn’t usually move together with other assets. When currencies and stocks go down, gold tends to go up, so during times of economic uncertainty and geopolitical tensions, it can reduce volatility. According to the World Gold Council, investing 9% of your portfolio in gold can reduce losses by 13%.

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