The reasons for investing in gold have remained much the same over history:
• Long Term Store of Value
• Asset of Last Resort
• Highly Liquid
• Asset Diversifier
Long Term Store of Value
Gold has acted as a reliable “store of value” because it fulfills the functions of money:
• It is portable and divisible. Its weight is a good measurement of a unit of value.
• It is indestructible, relatively scarce, and cannot be “manufactured”.
• It is easily recognizable and acceptable as a form of payment.
Through both hard times and times of plenty, gold endures. Market cycles are permanent facts of life but gold has maintained its longterm value. In contrast, most currencies (including the U.S. dollar) and industrial commodities have generally declined.
This is why gold is often purchased as a hedge against inflation and currency fluctuations. And why so many investors around the world see gold as the “ultimate asset” — an important and secure part of their investment portfolio.
In other words, the value of gold, what it can buy in real goods and services has remained remarkably stable over time. For example, a man’s suit in sixteenth century England at the time of King Henry VIII cost the equivalent of one ounce of gold, roughly the same as a suit would cost today.
Asset of Last Resort
Gold is known as the “asset of last resort”. Throughout history, national currencies have come and gone but gold has remained remarkably stable. Gold is an asset which does not depend upon any government’s or corporation’s promise to repay.
It is not directly affected by the economic policies of any individual country and it cannot be repudiated or frozen as in the case of paper assets. For these reasons, one quarter of all the gold in existence is held by governments, central banks and other official institutions as part of their international monetary reserves.
There is nothing to suggest that gold’s reliability as a long-term store of value will change in the future, despite there being from time to time a more attractive “money” safe haven such as the U.S. dollar, for example, or the Swiss Franc.
Gold is among the most liquid of the world’s assets. It can be readily sold 24-hours a day in one or more markets around the world. This cannot be said of most investments, including stocks of the world’s largest corporations.
In addition, the trading spreads on bullion are comparable to those on stocks and bonds (which are considered to be liquid assets). Finally, it takes about the same amount of time to execute a trade in gold as it does for stocks and bonds.
Whether your investment approach is conservative or aggressive, gold can play a vital role in diversifying your portfolio. For this reason, many experts urge investors to keep a portion of their total assets in gold.
Since most portfolios are invested primarily in traditional financial assets such as stocks and bonds, adding gold to a portfolio introduces an entirely different asset. The purpose of diversification is to protect the total portfolio against fluctuations in the value of any one asset class. Gold does exactly that. Gold is a solid, tried and true Investment!