The Basics of Gold Investment
Gold has been used as a medium of exchange and a store of value for centuries. Precious metals are a mainstay of commerce, and though they aren’t used in circulating coins anymore they are still used for investment purposes.
The price of gold is still one of the most important market indicators, and gold is a crucial asset during hard times. Its role may have changed but it remains a linchpin of finance.
The History of Gold In Commerce and Investment
It’s not certain exactly when gold was discovered, but we know that around 4000 B.C., an Eastern European culture began using it for decoration. Jewelry was the first use for the yellow precious metal. But by the time Egypt rose to power, gold had become the standard of international financial exchange.
Gold’s properties made it ideal for commerce and value storage from the very beginning. It was soft and easy to work, not requiring the use of specialized tools or sophisticated mining methods. It was also rarer than other mediums of exchange that were used. Ingots of iron or copper as well as metals measured by weight had been used for exchange, but by around 650 B.C. gold and silver were being formed into coins. Originally coins were made from electrum, a naturally-occurring alloy of gold and silver, but later series made in the kingdom of King Croesus of Lydia were made of pure gold and silver.
From that point on gold coins were a regular part of world commerce. Silver became the main medium of exchange from the time of Greece on, but gold was still used for larger denominations. Gold continued to be used in commerce and coinage through the early part of the 20th century, when its price compared to new fiat money made it impractical to use for currency any more.
Gold began its resurgence with the Krugerrand and other bullion coins which followed. It had always seen some use as an investment commodity, but with prices rising against most of the world’s currencies it became a much more important asset. Since the 1980s gold investment has grown more popular and various new coins, bars and rounds have come onto the market, as well as new gold investment vehicles.
Modern Gold Investment
Today, almost 50% of gold use goes to jewelry, which has been a popular use for gold since the beginning. But the second biggest segment is investment, at almost 30%, then almost 15% used as a store of value by central banks. Technology use makes up the rest.
Gold is what’s often referred to as a hedge or haven asset. Some investors dislike it because unlike other hedge assets, it does not earn interest. Treasury bonds are often the main competitor with gold for the top spot in the category because of their interest-bearing nature, and the two are generally connected in price.
Investors have turned to gold in times of economic uncertainty. Bonds issued by governments are backed by confidence in that government, but gold has been a stable medium of investment and exchange for much of the history of civilization.
Some investors have used gold as a hedge to offset other assets in their portfolio, to increase its diversification. This has traditionally strategy for limiting risk, though experts differ on the correct amount. Gold has been an effective store of long-term value in the past as well.
Types of Gold Investment
- Jewelry: Jewelry has been a method of investment in many cultures and is the most ancient reason gold was mined. Many cultures still rely on high-purity gold jewelry as a store of value, particularly India and Southeast Asia. Gold demand for festivals like Diwali, Durga Puja, Baisakhi and Gudi Pavda is a massive part of world gold demand. Premium is higher for jewelry and resale value can vary, making it a less attractive choice for investment for some.
- Physical Gold: Coins, rounds and bars of bullion are one of the best-known options. Physical gold is the most straightforward and traditional way to invest, though there can be downsides with storage and larger quantities may require insurance.
- Gold Stocks: Large mining companies are traded on the stock market and allow for investment in gold without direct exposure to its commodity price. The stock moves somewhat with the gold price but introduces other variables that can change the price like the underlying health of the company or the areas in which its mines are located.
- Gold Futures and Options: Futures and options are both financial instruments that allow investment in gold. At the most basic level futures and options allow for an investor to purchase a set amount of a commodity for a set price at some time in the future. They can get complicated, though, and it can be easy to overleverage yourself if you do not know what you are doing.
- Gold ETFs: Gold ETFs are a basket of derivative contracts backed by gold, but without direct ownership. It does not move directly with the spot price of gold but gives exposure to the asset. Like futures and options, they are a more complicated asset to understand for the average investor.
- Digital Gold: Digital gold offers several advantages over other methods of gold investment. It alleviates the storages and insurance issues that can arise with physical gold and is straightforward enough for the average investor to understand. It can also be redeemed for physical gold, as unlike investment vehicles like ETFs it offers direct ownership of investment-quality gold. It also allows for the buying of fractional amounts in a very liquid form.
Beginning in Gold Investing
Gold has often been used as a hedge in tough economic times and a stable store of value. Make sure you research the best option for you. OneGold’s digital gold offers you safety, security, and the ability to start with as little as $2. Take advantage of the low premiums and tight buy/sell spreads of digital gold today to get your start in gold investing today.
A guide to investing in gold.
A guide to investing in silver.