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Liquid assets represent an essential part of any investment portfolio, as you can quickly convert them into cash if necessary. Many people evaluate assets before purchasing to determine their liquidity.
Is gold a liquid asset? Generally, experts consider gold one of the most liquid assets on the market today. You can review more about gold investment and liquidity with our team at the Oxford Gold Group.
Reach out to us for professional answers to your investment questions by calling 833-600-GOLD.
Defining Liquid Assets
Before we discuss the liquidity of gold, it’s essential to establish a common definition for liquid assets. Financial experts use the term “liquid assets” to refer to any asset you can readily convert to cash.
Fiat money, such as a hundred-dollar bill, represents the most liquid asset for most people. Therefore, you can easily exchange this currency for goods or services, generally without taking any intervening steps.
Many merchants accept liquid assets like cash because their value remains stable even when selling them.
Characteristics of Liquid Assets
Assets must display several characteristics to qualify as liquid. Generally, they must:
- Exist in an established market
- Have many interested buyers
- Come with easily transferrable ownership
Both consumers and businesses can use liquid assets when making purchases. As a result, they’re considered valuable as a primary way to complete financial transactions.
Common Examples of Liquid Assets
Reviewing common types of liquid assets can help you better understand these financial tools. As we mentioned earlier, cash represents the most common type of liquid asset. Cash in your savings account, pocket, or money market all act as liquid assets.
Other common examples of liquid assets include:
- S. Treasury bonds
- Mutual funds
- Money-market funds
You have to take a few extra steps to liquidate the value of these assets, but it is generally a relatively simple process. Therefore, you can easily convert them to cash, and they have a high amount of liquidity.
Gold Represents a Liquid Asset
Is gold a liquid asset? While many people do not think of it in such a way, gold represents one of the most liquid assets in the world, according to financial experts. In fact, gold remains heavily traded in financial markets around the world.
The World Gold Council (WGC) reported gold as the second most liquid asset in the world in 2021. Gold’s high amount of liquidity comes from the daily trading volume it sees worldwide. In many cases, billions of dollars worth of gold get traded every day.
Of course, basing liquidity simply on trading volume may not tell the whole story. However, it does show that gold has many interested buyers, an established market, and ownership that’s easy to transfer, the three qualities that make up a liquid asset.
Compare Gold with Other Liquid Assets
Gold represents one of the most heavily traded assets around the world. You can compare it to other assets like:
- S&P 500 Stocks
- S. T-Bills
- Sterling and Euros
- The Yen
- Dow Jones
Gold trades at a higher volume than all of the above assets save for S&P 500 stocks, making it an incredible choice if you want to invest in a liquid asset. Keep these factors in mind when making your investment decisions.
Additional Benefits to Investing in Gold
Gold represents an asset with a high degree of liquidity, already making it a tempting investment option for many individuals. However, gold comes with numerous other benefits that you can consider before purchasing.
Gold offers minimal credit risk for investors and often gains value more quickly than fiat currencies, making it a solid choice. It also has a reputation for enhancing the performance of investment portfolios, especially in recent years.
While gold often does not show tremendous leaps in price, it does tend to steadily increase in value, providing you with a reliable source of long-term returns. We also find it effective in mitigating your losses when the market experiences stress.
Gold’s Rarity Helps It Maintain a Steady Value
Unlike many liquid assets worldwide, gold is a relatively rare mineral. Our world only contains so much gold, and much of it has yet to be mined. Nevertheless, mines have increased production by around 1.4% annually for the last two decades.
Consumer demand has far exceeded this rate. Demand from countries like India and China increased over 50% in the recent past, going beyond the current abilities of mines to keep up while increasing the price of gold on the market.
While the market price of gold sometimes dips, overall, this metal’s value has increased yearly since the 1970s. The steadily rising value of gold makes it an excellent choice for investors, and liquidity means you can easily sell it once it gains enough value for your needs.
Gold Handles Both Inflation and Deflation Well
Historically, many governments tied the value of their currency directly to precious metals like gold and silver. This gold standard meant that inflation could impact the overall value of gold. However, the U.S. broke the gold standard in the 1970s.
After breaking the connection between gold and fiat money, gold no longer experienced issues related to inflation. In fact, gold tends to grow in value during periods of inflation and retain its value even during deflation.
The experts tend to credit the relatively fixed amount of gold available globally for this price stability. Governments can print more money, changing the value of fiat currencies, but for the most part, we have a relatively set amount of gold to work with in the world.
Gold Allows You to Diversity Other Liquid Assets
Is gold a liquid asset? Gold not only offers you a high amount of liquidity, but it also provides a sense of security to investors. Financial experts have been recommending diversification for many decades as a way to protect your investments even in times of economic upheaval.
However, we’ve seen even diversified portfolios take significant hits, especially during the financial crises of the past two decades. Many people lost money even if they diversified with:
- Hedge funds
- Real estate
- Broad commodities
On the other hand, gold maintained a reasonably steady price, even as the rest of the market faced multiple upheavals. Actually, gold rose in value throughout many of these periods of financial turbulence.
Therefore, many financial experts now recommend including gold in your IRA or other stock plans. This precious metal provides a stable backbone to many investment plans, even if the rest of the market fluctuates wildly yet again.
Gold and the Global Market
An established market represents an integral part of determining the liquidity of an asset. For example, gold has a worldwide market, with individuals, companies, and governments looking to buy this precious metal in many countries.
Gold has a robust and liquid market, with many derivatives and spot contracts. In addition, many people engage in futures trading with gold, providing you with increased liquidity for your investment.
Deciding how you want to keep and trade gold can impact the liquidity of your investment. You may wish to speak with a financial expert about the method that works best for your situation.
Gold Often Represents a Tangible Asset
Some assets are tangible, meaning they are assets that can be touched and take up physical space. So, gold coins, bars, and bullion represent tangible assets that must be stored and protected.
You may also trade gold securities and futures. These assets correlate to tangible assets but often do not have a physical presence of their own.
You May Also Invest in Non-Liquid Assets
Liquid assets, including gold, represent an essential part of any investment plan. However, you do have additional options to preserve and grow your wealth. Many people choose to invest in some non-liquid assets as well.
Non-liquid assets are harder to convert to cash. However, they often hold value very well, making them a valuable resource during a tough financial market.
Real estate and property represent typical examples of non-liquid assets. Unfortunately, owners have to go through a complicated series of steps to sell the assets to another buyer to get the value out of these investments.
Consider Additional Assets Used in the Financial Market
Liquid and non-liquid assets are standard terms used to describe items like fiat money, gold, stocks, and even real estate. However, they do not represent every available asset for your investment strategy.
Many people also have an “estate” as an asset. Your estate represents the assets left behind after your passing, typically for your family or another beneficiary. An estate may include both liquid and non-liquid assets.
Speak to Us and Learn More About Gold as an Asset
Is gold a liquid asset? Yes, investment professionals classify gold as a liquid asset because it is easy to convert it to other forms of currency.