As gold hovers near $1800 an ounce, investors are flocking to the commodity as a way to help hedge some of the inflation already creeping into the global economy.
Gold is, after all, an investment that’s worked for the last two decades. Gold prices have soared from $271 an ounce in 2001, to $1791.90 in 2021.
But, don’t take the last twenty years as your example, consider the last 2,000+ years.
Indeed, for many thousands of years, Gold has been seen as a reliable store of value.
History of Gold
Gold can be traced all the way back to 550-600 BC as a kind of currency when King Croesus of Lydia in Turkey ordered that gold coins first be made. The scarcity of gold combined with its malleability and durability helped position gold as a form of payment.
At that time, Turkey (then, the Kingdom of Lydia) had the largest storage of gold wealth. Traders used gold nuggets to exchange for goods prior to the creation of coins.
By the 1400s, the search for gold became an important part of European explorers expeditions. Explorers sought gold in far away lands like the Americas.
In the 17th century, England became home to goldsmith bankers. People could store their gold with these bankers who, in exchange, provided them with ‘running cash notes’ as a receipt for their gold deposits.
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In modern times, gold has continued to be seen as a relatively ‘safe” investment, not only because it helps to alleviate any depreciation in the U.S. dollar but also because in moments of crisis, investors tend to flock to gold. Meanwhile, in times of economic growth, gold also tends to perform well given that more people buy gold, including gold jewelry.
That said, gold is not without risk and in some cases, stocks often outperform the commodity. For example, in the thirty years between 1990 and 2020, the price of gold increased by nearly 400%. Great, right? Well, the Dow Jones Industrial Average gained nearly 1,000% in that time frame.
Between 2005 and 2020, for example, gold jumped by more than 300% while the Dow gained roughly half that, or 153%.
In other words, timing matters.
Gold Is Not Risk Free
It’s critical that investors realize that gold is simply another way to help diversify an investment portfolio. Gold is not without risk and there’s often an opportunity cost associated with investing in the commodity. That’s because, the better stocks are doing, often the harder it is for gold to keep up.
The flip side of that is that when stocks suffer, gold tends to gain in value.
One rule of thumb for investors to consider is that they keep 1-5% of their investment portfolio in gold. Gold has proven itself to be a helpful diversification tool that often helps iron out the fluctuations of volatile equity markets.