You have heard the jokes, you have heard the chest beating, you have heard ridicule and overly enthusiastic proselytizing on either side. From people scoffing at the very idea to cheesy signs shouting at you in garish neon to buy gold, you have been inundated in the confusion that is the gold market. So, what is all the fuss about? Why do some people swear by buying gold while others dismiss the entire thing out of hand? Which side is correct, and what does that mean for someone trying to make their investment portfolio stronger during a troubled economy? It can be overwhelming to make sense of it all!
Do not worry, though; while the debate is complex, it is not so complex that you cannot make an informed decision. The truth is that there are extraordinarily strong pros and cons to investing in gold. Being an informed investor is the first step to being a wise one, and while there are good reasons to throwing your hat into the precious metals market there are also a few things you need to keep in mind. This article will go over what you need to know if you are interested in getting in on this market.
Precious Metals are a Good Commodity
The electronics market runs on precious metals. Silver, platinum, palladium, and yes, gold is all vital to creating electronic components that make the modern world go. Transistors, connectors, and even wires utilize one or more of these metals in their makeup. Their rarity and utility alone would make them a solid addition to your portfolio, but there are other factors that set them above other potential options. These metals end up everywhere, from jewelry to tech components, which makes their presence in the market nothing short of universal. Gold in particular is one of the most sought-after commodities. It is the softest and easiest to work with among its brothers, making it highly valuable to any industry that uses it.
The real value is not just in existing markets, but in emerging ones. As more nations modernize and become more integrated into the technological standard by which the rest of the world operates, the demand for precious metals increases. That demand is only going to keep rising as these emerging tech nations develop, necessitating more access to technology and more complexity within that technology. Precious metals are a market that only stands to go up in value, as the demand is not going anywhere any time soon.
It Makes a Good Bulwark Against Market Forces
We live in uncertain times. According to (source), the United States faces another potential recession on the horizon. Uncertainty is one of the most well-known and reliable market forces, ironically enough. Inflation and rising prices of goods devalue the dollar, which can end up losing an otherwise smart investor a lot of money. As you can see at https://investingingold.com, it also acts as what is called a hedge investment. Hedges are investments that are expected to either maintain or increase their value over time. Given the previously discussed utility of gold and its inherent value as currency through history, it qualifies as a strong hedge investment. Having it in your portfolio can help protect against catastrophic shifts in the market, as it is unlikely that its value will drop due to the inflation of the dollar.
The reason for this is related to the shift from the gold and silver standards for currency to a fiat model. Once upon a time a dollar was worth a specific amount of gold, and someone could theoretically take that dollar to a bank or reserve and exchange it for the amount they were owed. The dollar was representative currency, which was stable overall but limited how much money or credit the nation could have at any time. In 1971 the United States dollar was changed to fiat currency, backed not by gold but by the faith and power of the United States government. While this made the dollar more versatile, divorcing it from its previous standard also made it more unstable. This instability is usually not enough to make a difference, but when the market dips the dollar’s value dips with it. Having a strong protection hedge against these forces is a savvy idea.
It is a Naturally Diverse Option
One of the major advantages of gold as an investment is that it naturally diversifies your portfolio. The word ‘diversification’ gets thrown around a lot in investment talks, but what does it actually mean? The short, obvious answer is that a diverse portfolio is one that contains multiple kinds of unrelated stocks and assets. Diverse portfolios allow you to take market hits on the chin and roll with the punches, as you can see here. Disaster in a market will make the person who invested only in that market go ruined, while it will make the diverse investor be inconvenienced.
Consider your local big chain supermarket. It succeeds partially because it has such a wide range of unrelated items for sale. It can sell coats and swim trunks in the same department, despite no one ever needing both at the same time. The point, of course, is not needing them at the same time. The coats sell better when it is cold outside, and the trunks sell better when it is hot. By having both, the store maximizes the number of potential customers buying something from them. It does not matter if no one is buying coats, everyone is buying trunks – and the supermarket still profits.
Gold has the unique property of being naturally diverse. It tends to move in negative to the dollar’s value, which means when the value of the dollar dips, gold’s value rises. This is the heart of why it is traditionally used as an inflation hedge, but it also contributes to diversification. The good rule of thumb is to keep it as no more than 10% of your investments, as any more starts to sacrifice security for risk. Overall, gold is not a miracle asset to invest in. Like any commodity, it comes with its own risks and rewards. However, savvy investing and an understanding of the market can make it one of the more robust additions to your portfolio.