8 Reasons to Own Gold (+3K Views)

Gold is respected throughout the world for its value and rich history and people have continued to hold gold for various reasons and below are eight of them.

By Lorimer Wilson, Managing Editor of munKNEE.com and a frequent contributor to eResearch.com, usfinancepost.com, bitgrum.com and talkmarkets.com.

1. A History of Holding Its Value

Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages. People see gold as a way to pass on and preserve their wealth from one generation to the next.

2. Weakness of the U.S. Dollar

Although the U.S. dollar is one of the world’s most important reserve currencies, when the value of the dollar falls against other currencies this often prompts people to flock to the security of gold, which raises gold prices.

3. Inflation

Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Since World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979 and 1980. During those five years, the average real return on the Dow Jones Industrial Average was -12.33%, compared to 130.4% for gold.

4. Deflation

Deflation, a period in which prices contract, business activity slows and the economy is burdened by excessive debt, has not been seen globally since the Great Depression of the 1930s. During that time, the relative purchasing power of gold soared while other prices dropped sharply.

5. Geopolitical Uncertainty

Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the “crisis commodity”, because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. In addition, gold rises when confidence in governments is low.

6. Supply Constraints

At the same time, production of new gold from mines has been on the decline since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. It can take from five to 10 years to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices.

7. Increasing Demand

Increased wealth of emerging market economies boosts demand for gold. Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated.

8. Portfolio Diversification

The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.

Conclusion

Gold should be an important part of a diversified investment portfolio because:

• gold’s price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline,
• gold has always maintained its value over the long term even though its price can be volatile in the short term, and
• gold has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering.