Owning gold serves various purposes for individuals and governments alike. Gold jewelry has always been popular due to its beauty, value, and exceptional durability. Much of the gold ever mined throughout history is still in circulation, with recent years witnessing an increase in gold usage in manufacturing, particularly in electronics. This makes salvaging gold economically worthwhile.
Gold also serves as a hedge, providing a means for individuals and governments to offset the risk of other investments, currency fluctuations, or inflation. Governments hold substantial amounts of gold for this purpose.
Some people own gold with the intention of making money from it. They may speculate on gold by buying and holding it, anticipating that its price will increase over time, similar to how people invest in stocks or real estate.
The duration for holding gold can vary significantly, ranging from a lifetime investment to shorter-term trades that may last only a few minutes. Short-term holdings are commonly referred to as trading, where individuals speculate on the price of gold either increasing or decreasing.
Typically, investing involves the intention to hold a position for at least the medium term, while trading involves shorter time frames. Although there is no specific threshold determining when a trade becomes an investment, investors generally plan to hold their positions for several years.
The key distinction between investing and trading lies in the underlying approach. Investors focus on the intrinsic value of gold, anticipating its appreciation over time. On the other hand, traders aim to capitalize on short-term fluctuations in the gold market, assessing supply and demand dynamics within specific time frames.
Principles Behind Gold Being A Sound Investment
Gold is a highly scarce metal, and all the gold ever mined would amount to a relatively small cube of about 20 meters in diameter, weighing approximately 174,000 tons. Annually, around 2,500 tons are mined, with only about 500 tons allocated for investment purposes, while the rest is used for jewelry, dental, and industrial applications.
The limited supply of gold compared to the overall gold market adds considerable stability. Investors need not worry about sudden surges in supply due to massive gold strikes that could potentially drive prices down. Instead, the price of gold is primarily driven by demand, which has historically remained fairly high since ancient times.
Gold has always been a desirable investment, with its demand influenced by people’s financial capacity. During prosperous times, individuals can invest more, and during economic downturns, they may have less to allocate for investments like gold and stocks.
While both gold and stocks compete as investment options, gold stands out for its stability during economic downturns. When the economy falters, people tend to allocate a larger proportion of their funds to gold rather than stocks. Gold’s value is more durable, as it remains immune to the risks associated with the deteriorating fundamentals of businesses that can negatively impact stocks.
Unlike stocks, which are contingent on a company’s performance and market conditions, gold’s price is primarily driven by demand for the metal itself. This characteristic makes gold a more reliable long-term investment compared to stocks.
While stock investments rely on past performance, the long-term durability of gold has been time-tested and is expected to persist consistently in all economic conditions. Consequently, gold is considered one of the most reliable investment options, outperforming many other types of investments over the long term.
How Gold Has Performed as an Investment
Many investors tend to buy and hold investments without closely considering the current trend. During bullish periods, gold can indeed deliver impressive returns over several years. Conversely, during bearish periods, it can suffer substantial losses.
However, if investors choose to actively engage with gold by going long (betting on rising prices) or short (betting on falling prices) and ride with the trend, the potential for capital gains can be significantly increased. The trends in gold can be long-lasting, potentially spanning decades, providing opportunities for investors who have a long-term outlook.
By examining long-term, inflation-adjusted charts, investors can easily identify distinct trends in gold, making it easier to understand where they are in the long-term cycle of gold.
While the investment industry often advises against trying to time the market or investments, it is indeed wise for investors to monitor the performance and trend of their investments regularly. Understanding the current trend can provide valuable insights for making informed decisions and adjusting investment strategies accordingly. Ignoring these factors can be imprudent, as staying aware of market dynamics is an essential part of successful investing.
A Brief Walk Through History With the Price of Gold
Around a century ago, gold’s value stood at approximately $470 per ounce when adjusted for inflation. Fast forward 100 years, and it is now valued at around $1280 per ounce. Holding onto gold throughout this period would have yielded a decent profit, accounting for inflation. However, compared to the potential gains from tracking the stock market, gold’s returns might seem underwhelming.
Yet, the story changes when we consider timing gold investments. If one has the skill to time these investments, the potential for much higher returns emerges. This principle applies to stocks as well, but gold has the added advantage of being somewhat easier to predict.
Imagine buying gold back in 1815 during a market decline, which turned out to be an unfortunate time as the value of gold plummeted by half just five years later. Nowadays, during a market decline, one can easily profit by going short on gold. However, some investors struggle to view short positions as viable investments.
A different approach involves investing in securities that gain value when gold prices rise, similar to how inverse gold ETFs function. This allows us to maintain a long bias while effectively engaging in a short sale.
Over the subsequent 14 years, during the crash of 1929, gold remarkably climbed from $243 to $644. Even those who only bought after the crash would have doubled their investment in the following five years, while stock market investors were hit hard.
Then, from 1934 to 1971, gold endured a prolonged bear market, with its value dropping to $226. Being invested in gold during this period would have been ill-advised, as indicated by the declining charts.
The turning point came in 1971 when the U.S. abandoned the gold standard. Subsequently, the price of gold skyrocketed over the next nine years, reaching over $2000 per ounce—a nine-fold increase. Unfortunately, the following two decades were harsh for gold, with its value plummeting all the way to $368.
However, the subsequent decade proved extremely profitable for gold investors, as its price surged, almost in a straight line, surpassing $1900 again. Nevertheless, in recent years, a new bear market has emerged, causing the value to drop below $1200 in 2015, stabilizing since then. The future remains uncertain, but history has shown that gold’s fortunes can change dramatically depending on market conditions and timing.
Gold Investing Is Therefore Really About Timing
Whether someone chooses to go long or short on gold, it is crucial to align their investment strategy with the prevailing market conditions and long-term trends. Investors often set time frames spanning several years, allowing them to gauge overall market conditions and tailor their approach accordingly.
While there may be various reasons to own gold, speculation on its future price requires a keen eye on where the price is heading to make a profit. Even in long-term speculation, success hinges on assessing probabilities and understanding the likelihood of an investment yielding positive returns compared to other viable options.
Ultimately, the goal is to make informed decisions that maximize the chances of profitable outcomes and avoid losses. Careful evaluation of market trends, economic indicators, and other relevant factors is essential when considering gold or any other investment vehicle. Being proactive and adaptable in response to changing circumstances can greatly improve an investor’s chances of success.
