Gold is widely considered a safe-haven investment that can be depended upon to hold its value, regardless of what the stock market is doing. In a world where people are chasing rapid growth, this asset class may seem unappealing, but recently, we’ve seen attitudes change, with both equities and gold trending upwards.
Why Do People Invest in Gold?
Gold is a metal that people have valued for thousands of years. TCoins were once made from gold, and any world currency was backed by it. Today, we take a different approach to managing money, but gold has retained much of its value.
Gold’s appeal as an investment comes from its stability. While the stock market goes through booms and busts, gold and other safe-haven investments tend to retain their value. You may not see the same meteoric rise in the value of your investment as you would if you bought shares in a young company that was about to become the next Apple or Amazon. Still, the trade-off is that gold’s unlikely to lose value in the way a failing company would. It’s a hedge against risk.
What is Gold Used For?
Gold is more than just a pretty-looking, shiny metal. While it is used for making jewelry and other decorative items, it has value in other areas, too. Gold’s high conductivity, durability and resistance to corrosion make it a popular choice as a conductor for electronic circuits. It’s also a biocompatible metal, so it’s often used to make medical devices.
These desirable properties mean there’s a demand for gold outside of its simple popularity as an investment. Gold is not merely a speculative asset; it has intrinsic value because of its use in industry.
How is Gold’s Price Linked to the Health of The Economy?
The price of gold is linked to several geopolitical and macroeconomic conditions. It responds to inflation, as investors tend to turn to gold as a safe haven when inflation is high, driving up the price of gold. The price also increases during times of geopolitical uncertainty, as once again, traders look to avoid volatility.
Meanwhile, during prosperous times when investors feel more confident, gold prices fall. They may also drop if geopolitical circumstances change or more efficient mining techniques are discovered, making it easier to get gold out of the ground.
The Link Between Gold Prices and the Central Bank
Central banks often buy gold as a way to diversify their reserves. Just as investors buy gold to offset the volatility of other assets they hold, gold offsets the volatility of the bonds and currencies banks have exposure to.
This buying activity helps provide a support floor for the price of gold. In 2023, central bank demand for gold totaled 337.1 tons. Total demand for gold, including OTC trading, was 1,267.1 metric tons in the third quarter of 2023. This strong demand helps keep prices steady, regardless of activity in more volatile investment areas.
The Outlook for Gold in 2024
Gold is a safe haven asset, so by definition volatility is low. Many analysts, including those at UBS Group and JP Morgan, have an optimistic outlook for gold throughout 2024. JP Morgan analysts predict the asset could hit new highs in 2024, peaking at some point in 2025.
If inflation falls in 2024, this may not benefit commodities as a whole. However, current economic and geopolitical uncertainty could support gold prices throughout the year, especially as gold typically has a low correlation with other asset classes.
How to Invest in Gold
There are many ways to invest in gold, depending on the amount of gold you’d like to buy and your time horizon. Popular methods include:
- Physical gold
- ETFs
- Mining Stocks
- IRAs
Some investors like to purchase gold coins or bars and have them delivered directly to them. This offers the reassurance that gold is an actual physical asset. However, it comes with additional costs for delivery, storage and insurance (or risk, if someone holds lots of gold at home). Another downside with purchasing physical gold is that it’s a less liquid asset, and selling it in an emergency may be difficult.
Gold ETFs offer a way to get exposure to gold without worrying about the physical good. ETFs such as iShares GoldTrust and SPDR Gold Shares are physically backed by gold, but can be traded quickly and easily.
Another approach that doesn’t require buying physical gold is to purchase stocks in gold-mining companies, assuming their fortunes will be tied to the price of gold. Some of these companies even pay dividends, offering an additional source of income.
For those with a longer time horizon, a gold individual retirement account offers a tax-advantaged way of investing in gold as part of a retirement plan. These IRAs usually offer the option to invest in multiple precious metals, adding a little diversity to your portfolio.
Which option you choose will depend on your level of risk aversion, how long you plan to hold the gold for, and how liquid you’d like your investment to be. However, having some gold in your portfolio along with other assets could make a lot of sense.
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