How Does Investing in Gold Work in the Long Run?

Gold has been a supremely valuable commodity since ancient civilizations were thriving. Now, it is one of the currencies of choice the world over. Gold has retained its appeal, particularly to investors who use it to avoid portfolio risk with the effects of fluctuating stock markets.

Many top investment advisors recommend the allocation of spending to commodities, like gold. The strategy limits the loss of assets in an emergency, but like most investments, hiding in gold doesn’t come without risk. It is also a common cushion against poorly performing markets, so it can be argued that gold shines brighter as a short-term asset.

The price of gold doesn’t rise reliably with the state of the stock markets. Since it does not typically produce a quick profit, the return on investment is entirely based on the gold price appreciation. That’s why gold is one of the best short-term hedges available.

How does gold stack up compared to alternative long-term “safety investments?” Let’s take a look.

A Golden Age

Gold has likely had value for nearly as long as there’s been human civilization. Almost every culture has used it as a currency and a status symbol.

The Persian ruler, Darius the Great, minted the first gold coins in 500 BC, and many countries followed suit. Historical coins minted from precious metals were made and accepted for bartering globally up until the 1930s. After the Great Depression hit, the world abandoned the gold standard for new avenues of safeguarding and accumulating wealth.

However, after World War II ended, many world leaders came together to form the Bretton Woods Agreement. The war had devastated international financial markets and left many of the key participants in dire economic straits. In an effort to help with recovery, the global superpowers developed the Bretton Woods system, a set of rules and regulations tying exchange rates between nations to the recognized value of gold.

The United States was the holder of two-thirds of the world’s gold at the time. It negotiated to peg the market value of gold to the US dollar, and the committee agreed. The coalition helped to create a standard benchmark for gold that backed America’s paper money with the nation’s impressive stockpile of this valuable commodity.

The gold standard was then adopted by most countries for a time after the agreement, eventually switching to the present currency system. The United States was the last to give up the new gold standard (only doing when the government needed to redirect more funding toward the Vietnam War).

Personal gold purchases as an investment didn’t feature much until 1975, the year the United States legalized individual ownership and trade of gold bullions. From there, the prominence of gold has risen, along with the trade value.

Now, it is used as a method of padding portfolios to avoid financial risks. Physical gold has proven itself to be an excellent commodity for investors around the world, working as reliable storage for wealth or a solid hedge as economies flail.

Investing In Gold

hand stacking gold coins to describe one way to invest in gold

If you want to understand the viability of long-term investment into gold, it’s helpful to explore all the avenues. Gold ownership methods differ, and there is much on offer in the current financial climate.

Gold Bullion

Investing in gold bullion refers to the purchase of any form of pure gold, certified for its weight and purity. It’s the most well-known form of gold investing. Most people imagine bullion in the form of bars, but gold in any shape counts if it meets the acceptable purity and weight criteria.

Gold Coins

Gold coins are a form of bullion minted in large quantities by governments. Unlike gold bars, the coins are small. It allows ease of handling and an easy determination of their value with global financial publications.

Gold ETF’s and Mutual Funds

An alternative to the direct purchase of gold bullion is an exchange-traded fund (ETF). Like mutual funds, this is a pooled investment that is tradeable. These instruments represent a certain amount of gold and are bought and sold like stock.

The most immediate benefit of ETFs is the lack of physical goods to transport and store. It typically costs less than buying gold bullion, and it is also a convenient means to diversify any portfolio quickly.

Gold Mining Companies

Putting money into a gold mining company is a gold investment method that minimizes the risk to your assets. While the value of gold is determined directly by its market value, gold mining companies use common business practices to remain profitable in a bear market.

Problems of Long-Term Gold Investing

Several issues arise when investing in gold. One of the most obvious is transport and storage, but there are other problems to consider.

Securing Your Investment

The purchase of gold warrants further expenses when it comes to transferring, securing, and insuring it in case of damage or theft. These extensive costs typically have a significant mark-up on the gold price, hampering the profit potential of your gold bullion.

This particular issue is mitigated somewhat by investing in gold derivatives such as ETFs, mutual funds, and gold mines. However, the value is determined by the price of gold, and all these areas may see a sharp decline, depending on gold’s worth at the time.

Buying gold is also a direct investment in that market value—every dollar fluctuation will have a direct impact on your holdings.

Gold as a Place Holder

There’s also the issue of size and value for bullion assets—you can’t sell a percentage of a gold bar. Gold is generally used as a hedge against emergencies. If all your eggs are in one basket, problems arise when it becomes necessary to sell the piece at a lower value.

When compared to the value of stocks and bonds, the value of gold tends to trend downward over longer periods. For example, from 1990 to 2020, the price of gold increased by over 360%. However, the Dow Jones Industrial Average increased by nearly 1000%.

If you look at a shorter period (like 2005 to 2020), you’ll see that gold increased by 330%, while the DJIA only increased by 153%. This indicates that while stocks have small increases in worth before an exponential increase (or potential decrease), gold is a steadier climber.

A common trait of gold is that it will only see a significant increase in value when the value of stocks and bonds have plummeted. However, the inverse tends to be true as well. It is why the market value for gold can serve as an indicator of the overall health of the market.

Benefits of Long-Term Gold Investment

hand having a golden egg to describe gold investment

Despite the potential issues with gold value, storage, and transport, gold bullion is still a potential long-term boon for future assets. An investment in gold is generally used as a parachute in case of geopolitical unrest or market upheaval that causes a downturn in the economy. One of the reasons that bullion is popular is the instability of paper money in those scenarios.

Gold has an intrinsic value attached to it that is only affected by significant external factors. Otherwise, it’s an ideal currency that doesn’t degenerate in storage. It can also be easily divided into a smaller sum and shaped into portable forms for simple exchange.

As part of a portfolio with many other assets, gold facilitates diversity and reduces your financial risks long term. It may not provide a substantial profit by itself, but it has unrivaled value as a wealth safe haven.

Over time, gold functions as near-perfect protection against personal wealth decline. It covers any emergency as a currency that will have value in any developed nation when it needs to be liquidated.

Gold retains its value better than any other material, making it an ideal safety net if stocks fall. It is also true that the price of gold tends to be highest in adverse economic conditions as investors dive for cover.

Gold—the Best Investment

While investing in gold has its share of risk, it’s no more than any other investment opportunity out there. Smart spending and careful observation of the market will help you to avoid any potential losses, but with gold, making wise financial moves is even easier.

The value of this commodity is one of the most durable on the market. In the event of a crash, gold will likely be the last thing to devalue anywhere, no matter your location.

Gold bullion’s physical properties make it hard to transport, and storage costs may eat into whatever profits it accrues, but it’s easier to track than paper stock. It won’t degrade, it’s easier to protect, and can be insured against unforeseen losses.

Lastly, rolling any savings or retirement funds into gold is a good way to protect them for your family in the long run.

Contact Oxford Gold Group—The Gold Experts

Protect your future wealth with The Oxford Gold Group. We offer a selection of gold, silver, and platinum bullion, delivering these metals in bar or coin form and various weights and purities.

For a more diverse and secure portfolio, contact The Oxford Gold Group today.

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