As I get closer to graduation, I’ve been trying to figure out “adult stuff,” like money and investing. I think I get the general gist of the stock market and investing: I’m supposed to have a diverse portfolio and use my 401k, right? However, I don’t understand gold. My grandparents own gold and talk about it sometimes, but I don’t get how gold can increase in value the way stocks can, or how to go about investing in gold. Experts, what’s with gold as an investment?
Gold has been considered valuable for almost as long as human beings have been on this planet. The reasons for that are simple: there’s only so much gold available, it’s an attractive metal, and it’s easy to shape into jewelry and coins.
That’s pretty much all there is to gold’s value, but its longstanding status as a store of that value has made it a pretty safe bet over the years. Gold was valuable a thousand years ago, and it will still be valuable a thousand years from now. That’s why some people choose to store some of their wealth in gold buy swapping currency for gold or gold-related investments.
As you seem to understand, investing is a key to building wealth. That’s because investments can grow in value, while cash alone is almost certain to decrease in value due to inflation. However, if the amount of gold remains constant, how can its value go up (or down)?
The reason is that gold--like everything else--can only be measured by how much we’re willing to give up for it. Its value is relative. So, instead of imagining that gold is all of a sudden worth more (in dollars) than it was, we can imagine that it is the dollars that are getting less valuable. Now, our question seems much simpler. Since currency inflation makes each dollar less valuable over time, it makes perfect sense that gold would rise in value relative to U.S. dollars over time.
Of course, it’s not just that the supply and demand for gold remain one hundred percent constant while currencies fluctuate and erode in value. There can also be spikes in the demand for gold that drive up the value of the metal. Often, gold is most apt to become attractive when the economy is lagging. Concerns about inflation can make gold’s steady value more appealing, and poor returns on stocks can cause more people to look for conservative--but profitable--alternatives to a risky, low-yield market. Gold is a good place to have your money when the economy takes a downturn, which is why gold investments are often described as being “recession-proof.” That term simplifies matters somewhat, but it is rooted in a common-sense truth. There are, of course, other factors in the value of gold at any given time--but we’ve covered the basics here.
So, how can you invest in gold? There are a variety of ways to do it. Just owning gold is a possibility, of course. You can also invest in gold on the commodities market, and through investment vehicles that allow you to invest in gold without having to have it on hand. Also, you can use stocks, too. There are plenty of companies that deal in gold, and you can bet on the gold market in indirect ways by investing in those companies. Experts advise that the best gold stocks are the ones that feature growing companies operating with no debt. In other words, keep the fundamentals of stock investing in mind if you’re combining a bet on gold with a bet on a company--the company needs to be solid in its own right!
Investing some of your wealth in gold can be a very good idea. You’ll want this strategy to be a part of a diverse portfolio, of course, but gold can be a great way to create the diversity and generate a bit of a “recession-proof” safety net for yourself. For more specific advice, we recommend consulting a financial adviser.
“Where gold speaks, every tongue is silent.” - Proverb