Diversifying your Investments with Gold

Since its discovery, gold has been a symbol of beauty, wealth, purity, and triumph. It’s also one of the few goods that can be used as a form of capital. Many proponents of gold investment point out that it is tied to success stories in generational wealth, since its unique financial standing as both an inherently valuable material and history as a direct form of currency grant it enhanced protections against market fluctuations.

History

In 4000 BC, tribes in modern-day Eastern Europe employed gold to produce beautiful artifacts for the first time. By minting the Shekel around 1500 BC, Egypt’s ancient empire became the first to employ it as a kind of international money. It was later adopted as the Middle East’s universal unit of measure.

Later, Egyptians learned they could mix gold with other metals to strengthen it and give it distinct colors around 1200 BC. They produced beautiful artifacts which are still marveled at today.

For centuries, gold was synonymous with currency, a concept which may seem foreign today. For example, the Florin was the first gold coin minted by the United Kingdom in 1284. Goldsmith Ephraim Brasher created the first US gold coin in 1787, but later coins became more silver than gold when the Coinage Act of 1792 imposed a nationwide 15:1 ratio of silver’s value to gold.

This was the beginning of the Gold Standard, where the value of currency was directly backed by the value of gold. This system was later replaced by the one used today—fiat money. This system gives governments full control of their monetary system by granting them the ability to control the money supply, which makes it now a contender as an investment since gold’s value may fluctuate more independently of currencies.

Importance of Diversification

One of the most central principles of investment is diversification. It is arguably the simplest way to reduce the inherent risk of investment. It can also stabilize fluctuations in your accounts because it limits the effect of bad news in sectors you hold investments in.

As an investor, you may be advised to diversity across both sectors as well as assets. For example, you can diversify by investing in unrelated sectors such as real estate and energy. However, you may also be advised to invest in different assets within these sectors, since different assets react varyingly to market conditions. Examples of these may include bonds and stocks.

Mutual funds are a commonly sought-out way to quickly diversify your investments with the convenience of not having to pick out each asset you’re investing in yourself. They are professionally managed by financial experts and pool resources from multiple investors to allow each of them access to assets they may not have been able to invest in themselves. However, it should be noted that there is inherent risk in trusting strangers with your finances, as these mutual fund managers know that their audience are investors who either do not have the time or drive to research the assets they’re investing in themselves, which makes these popular mutual funds vulnerable to exaggerations about their efficacy.

Gold is unique in that the material itself is considered an asset for its persistently high economic value, but one interested in learning all about investing in gold can invest in mining companies, jewelry, or through mutual funds for simpler diversification. However, the investor worried about mutual fund vulnerabilities may find the greatest amount of satisfaction in investing in physical coins or bars.

The Technological Age

Gold’s inherent value as a material cannot be overstated, especially given the role it plays in technology today. This role is due to the metal’s unique chemical properties. For example, it is used to produce semiconductors, which can be found in almost every piece of commercial technology that you could think of: smartphones, LED bulbs, televisions, and even some cars. This metal’s use in technology expands past semiconductors, too: it is used to make fingerprint sensors found in phones and commercial security systems and is the favored material for wire-bonding.

Demand for consumer technology is expected to increase dramatically in the long-term, as its rapid adoption in the previous decades displays.  Given gold’s role in the production of these products, the demand for the metal is expected to grow alongside consumer technology. This provides another reason this type of investment may help to secure generational wealth, even in turbulent market conditions.

A Hedge Against Inflation?

The most recent financial crisis, the Great Recession, in 2007 remains fresh in the minds of many today, and for good reason. Financial crises affect all aspects of one’s life and outlook and being ill-prepared for one can be disastrous. Financial experts have been saying for a few years to prepare for another financial crisis soon, as though the market has shown surprising durability against COVID, it cannot weather these rough conditions for much longer.

In fact, these warnings seem more relevant than ever, given the worrying rise in inflation over the past few months. In March of 2022, according to ilostat.ilo.org, the United States saw the highest rate of inflation in a single month in 41 years with a rate of 8.5%.

These numbers sound scary, but to understand them fully it’s important to know what inflation really means. Inflation is a decrease in purchasing power of a currency. This means that during a time of inflation, simply saving up money is not enough since the value of any money you save and do not invest will decrease in value. Therefore, it is important to have investments which can either match or outperform inflation rates.

Within this concept lies the most attractive aspect of this material as an investment—since the gold standard was shed, its value fluctuates more independently of fiat currencies and is therefore affected differently by inflation than fiat currencies. In fact, during the Great Recession, while the stock market saw dramatic drops, the value of gold actually spiked. Now, in times of unstable markets, investors look to it as a safer, more reliable investment than market-affected assets such as stocks which during corrections may be expected to dramatically decrease in value and potentially never recover.

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