Whenever people shop for gold coins, bars, and jewelry, one of the first questions they’ll ask is whether they’re making the correct investment. Gold is one of the most expensive minerals on Earth, and it’s only natural to wonder whether the value of your money will last if you convert it to gold.
In this article, our gold market experts will answer if gold does depreciate and whether investing in gold bullion is a wise investment for the average American to make.
Why Invest in Gold?
If you’re a first-time investor, you might be wondering why people treat gold as an investment instead of a depreciating asset. Most other forms of precious jewelry and ornaments—like rubies, sapphire, or sometimes even diamonds—depreciate over time. This depreciation occurs because these stones naturally acquire blemishes over years of wear and tear.
However, unlike gemstones, gold is soft, malleable, and infinitely workable in its pure form. 24-karat wedding bands, watches, and ornaments are rarities because jewelers and designers often alloy gold with metals like silver, copper, and platinum to maintain its rigidity. An 18-karat gold ornament might acquire some scratches, discoloration, and patina over time, but if you melt it down and reshape it, you will not lose any gold content while creating a brand-new accessory.
Gold has been a high-value item since before the age of written history. Unlike materials like jade, whale oil, and most precious metals, the value of gold does not depend on cultural norms and supply and demand. The entire world highly prizes gold as rare and beneficial, so there have been no shortages of buyers on the gold market.
Most financial advisors in the world see gold as a hedge against inflation because of its incomparable ability to hold its value and appreciate over time. Numerous monarchies, empires, and conquerors have owed their successes and legacies to an economy built upon a healthy supply of gold. For individual investors, a recent study from the World Gold Council reveals that people who dedicate 2% to 10% of their investment portfolio to gold experience higher performance than investors who do not.
What Is Depreciation?
Learning about asset appreciation and depreciation is essential before investing in any market or commodity. An appreciating asset increases in value over time, meaning that more and more people will be willing to pay more money to obtain it. Depreciating assets generally become less usable, desirable, and valuable as time goes on.
An excellent example of a depreciating asset includes most forms of computer technology, like your smartphone, laptop, and desktop computer. Over time, manufacturers will develop faster processors that are more power-efficient and are cheaper and easier to mass-produce. Future software will demand higher computing power and graphics processing capabilities, which your current devices will lack.
A thousand-dollar iPhone today will be worth a fraction of its sticker price in three to four years. The most notorious depreciating assets for private individuals and businesses are vehicles, office furniture, and professional equipment. Most of the items you buy will run on a depreciation schedule as they near the ends of their expected useful lives.
Does Depreciation Apply to Gold?
When you look at the price of gold on the international markets, you’ll notice some upward and downward trends, and to the untrained eye, this means gold is capable of depreciating. Most commodities you’ll buy in your life, such as machinery, electronics, and tools to run your small business, will decline in value. Even intangible assets such as trademarks, brand recognition, and intellectual properties will depreciate over time as new companies and more innovative technologies enter the market.
However, gold doesn’t run on a depreciation schedule as it has an unlimited lifespan. You can find many gold items from smiths and jewelry makers that predate the Age of Antiquity in museums, and they all look brand new. If you buy a 24-karat gold bar today and store it properly, it will still look shiny thousands of years into the future.
What Prevents Gold from Depreciating?
Corrosion-Proof Aesthetic Value
Some gold items such as wedding bands, brooches, and decorative plates might depreciate over time. The cause of this would be that their composition includes other metal alloys, such as nickel, copper, and zinc, which are capable of tarnishing and discoloration. The change in appearance can reduce the visual appeal of any gold item, along with its value.
However, pure 24-karat gold is practically incapable of depreciation. It has a near-perfect resistance to oxidation, the process by which most metals develop rust and corrode. Oxidation can also tarnish brass, copper, aluminum, and silver, producing a black patina that can be difficult to remove without the right cleaner.
Oxides form when oxygen penetrates the outer layer of most metals, reducing their protection from atmospheric elements. In most cases, positive electrons transfer out from inside the metal, attracting the negative oxygen ions that replace them. Aside from gold, the only other metals that resist oxidation are platinum, rhodium, ruthenium, iridium, silver, palladium, and osmium.
Consistent High Demand
Unlike other noble metals such as platinum, palladium, and osmium, gold is soft and workable. It has unparalleled electrical and thermal conductivity, which makes it useful for many commercial and industrial applications. According to the 2019 USGS Mineral Commodity Summaries, 37% of the market for gold belongs to the aerospace, electronics, and machinery industries.
Android and Apple phones contain an average of 0.034 grams of gold in their central processing units. Manufacturers love taking advantage of gold’s reliability, using it for soldered joints, connection strips, and relay contacts. You can find gold in many electronic appliances you use at home, such as your smart TV, laptop computer, and hard drives.
Fifty percent of gold demand goes to the jewelry market, a number that increases every year. A recent report from Facts & Factors reveals that precious metal demand for jewelry-making will reach $500 billion by 2026 at an 8.5% annual growth rate. If you combine these statistics with the rising demand for smartwatches, virtual reality headsets, and wireless charging ports, you’ll see how the commercial use of gold might triple in the next few decades.
A Futureproof Metal
Monarchs, politicians, and merchants have been adorning their homes with gold since the dawn of man. Today, not much has changed. Rappers, actors, and entrepreneurs even use gold to replace missing teeth.
Gold is a status symbol, and people see countries with the most amount of gold in their reserves as world powers. America has the highest amount of gold reserves, standing at a proud 8,133.5 metric tons as of February 2021. Germany, Italy, France, and Russia follow with between 2,000 to 3,000 metric tons.
America is also leading the world in aerospace research, where gold is an essential ingredient. It’s one of the most popular metals among NASA scientists, who use it for their lunar rovers, satellites, and space station implements. It requires no maintenance, lubrication, and heating to stay intact, making it one of the most dependable metals on Earth.
What Makes Gold a Hedge Against Inflation?
Unlike the value of fiat currency, which can rise and fall depending on geopolitical events, foreign exchange pressures, and national debt, gold has a long and colorful history of keeping its value throughout history. Gold is one of the most popular inheritance vehicles. Every year, thousands of Americans pass their wealth to the next generation in the form of gold bars, coins, and investment portfolios. If you don’t like a gold family heirloom, you can melt it over a flame and transform it into something new.
A Reliable Shelter During Times of Uncertainty
The value of the U.S. dollar can be unstable during economic depressions, and it can permanently depreciate after a nasty market crash. For example, the housing market crisis of 2008 caused global equities to lose over 45% of their value, and most banks that were willing to lend out dollars suddenly closed up shop. Millions of Americans found out that they couldn’t pay for the homes they were living in, and as their jobs and savings collapsed, so did the value of the U.S. dollar.
When uncertainty in the money markets is high, investors flock to gold to keep their portfolios healthy. During the 2008 housing crisis, the price of gold experienced a rally, nearly tripling in value and reaching $1000 per ounce before 2009. Only three years later, in 2012, gold doubled in value, breaching the $2,000 barrier that analysts thought was impossible.
Gold Keeps Up with the Times
When you look at the more than 3000-year history of gold, you’ll see that it historically increases in value as the cost of living rises. During high-inflation years, when the prices of goods and services go up and make the dollar worth a little less, financial analysts see the value of gold soar. Gold is a rare commodity that inflation can’t touch.
Deflation occurs when people run out of money to spend, businesses slow down, and the national economy screeches to a halt because of massive debts. Deflationary periods don’t happen very often in America, but that’s no excuse to avoid planning for them. The last deflationary period was the Great Depression in 1929, and the value of gold soared while other commodities experienced a sharp decline in prices.
Gold Is a Crisis Commodity
Analysts and seasoned investors often call gold a crisis commodity because people begin investing in it when world tensions develop. When people don’t trust their governments, they also run out of faith in their currency, leading them to invest in an internationally recognized high-value instrument of trade: gold. Gold soared in value during Brexit, the annexation of Ukraine by Russia, and the Greek sovereign debt crisis.
Is it a Good Time to Invest in Gold?
Gold is an essential part of every well-balanced portfolio. If you want to stop the erosion of the U.S. dollar from affecting you, and you’re a conservative investor who thinks for the long-term, it might be a good time to invest in gold. Learn more about investing in gold. Contact our experts at Oxford Gold Group by filling up the inquiry form on our website.