While the crypto and bitcoin phenomena may have stolen some of the sheen away from gold, the glittering metal still remains one of the world’s most sought-after possessions. Gold is considered the oldest and the most reliable currency and a dependable investment option and asset, particularly in times of economic downturn and market turbulence.
So, why does gold retain such a prominent place in our economy here in Australia? Find your answers with this beginner’s guide to investing in gold.
The element of gold
Gold is a metallic element classified in the periodic table under the symbol Au. It derives this symbol from its Latin name “Aurum” which means “shining dawn”.
Gold is incredibly soft and malleable, and a single ounce can be beaten into a thin sheet half as thick as a human hair – five square meters in area. This characteristic quality of malleability is one of the reasons gold is preferred for making jewellery.
Gold is a good conductor and is used in the manufacturing of chips and motherboards used extensively in computers, mobile phones and even spacecraft.
Every ounce of mined gold is exactly the same as every other ounce of gold ever mined. This explains why gold is a commodity traded on many exchanges based on nothing more than the simple principles of supply and demand.
How scarce is gold?
Gold is quite abundant in nature but is difficult to extract. Estimates by the World Gold Council put the current availability of extracted gold at around 190,000 metric tons, while the amount still believed to be underground is about 54,000 metric tons.
How do we get our hands on the shiny stuff?
Gold can be found as nuggets on the ground or while panning for in creek beds, but most of it comes from the mines where it is mined commercially in vast quantities. Mined gold is commonly found comingled with silver and copper.
What drives the global demand for gold?
The gold extracted by miners today is sought by several different industries. The largest use for gold is found in jewellery, which absorbs around 50% of the total gold production. Another 40% is typically invested in the gold commodity sector in the form of coins, bullions, medals, and gold bars.
The demand for gold comes from a mix of individuals, central banks, and exchange-traded funds such as EFTs that buy gold on behalf of other investors. The remaining demand comes from reliant industries for use in dentistry, heat shields, and tech products such as computers and phones.
What makes gold so valuable?
So, why is gold so sought after and expensive? Here’s the answer. Back in the day, gold was a lot harder to mine and much more difficult to obtain. This gave it its premium value. Some of this has carried through the ages and even today, people view gold as a solid and safe investment.
Even the early currency notes were linked with gold, with every printed note matching an equivalent amount in gold for its value that was held in a bank vault. The idea behind this was that the currency note could be exchanged for gold at any time. Today, our currencies are fiat currencies that are no longer linked to a gold standard.
What makes gold a safe asset?
Investors prefer to trade in gold when the markets are experiencing turbulence and volatility. Gold is a stable asset and its core value remains largely consistent, thanks to the heavy demand. Investors also often include it in their portfolio as a hedge against investment risk.
How is the price for gold determined?
For all its storied history gold remains a commodity, much like copper or iron. The market supply and demand for gold are used as indicators while pegging down its price.
How do I invest in gold?
Diversification is key when investing in gold and there are three mainstream strategies to follow. And they are:
1. Physical Gold & Gold Jewellery
Buying gold is one of the most popular forms of investing in gold. It is also, most likely, the safest option for someone who is still learning about the market. You can purchase bars or coins from mints, gold traders, banks, jewellers and private dealers.
Gold jewellery can retain much of its value if it is kept in a good condition and maintained well. Also, if your jewellery is vintage with some historical significance, or has been designed or used by someone prominent, you can be sure that your investment will remain stable.
3. Streaming & Royalty Companies
Another interesting option for investing in gold is to buy stock in a streaming or royalty company. Streaming and royalty companies provide gold miners with cash upfront in exchange for the right to buy gold and other metals from nominated mines at reduced rates.
These businesses are similar to specialty finance companies but are paid in gold. For many investors, this is one of the best all-around options for investing in gold.
The final observation
As one of the most valuable commodities in the world, gold is enduringly popular, comparatively safe and largely liquefiable. It is a great option for those seeking to diversify their portfolio and mitigate their risks. However, it is important to remember that there are both pros and cons to investing in gold and your choice of investment depends on both – your risk appetite as well as your personal preferences.
If you’re interested in this subject, come pick our brains at WealthyYou and let’s work out a plan together. There’s a golden future awaiting!