Gold is not only a valuable metal, it also possesses a mysterious attraction to most people, highlighted by the many important appearances of gold in history. In a multitude of historical stories, ranging from Tutankhamen, King Midas, the three Kings, the search of the Alchemists and the tales of King Solomon to the the California Gold Rush, gold has always spoken to the imagination of many. And even though we are familiar with the numerous applications of gold in medicine, electrical engineering and space travel it also still valued a lot for it's decorative purposes.
Depending on the timeframe you are interested in, I would either call gold a good diversification strategy for a equity portfolio or a strong hedge.
This graph shows the monthly correlation coefficient (lower part) between the gold spot price and the S&P500, as well as the respective prices. A correlation coefficient is always between -1 and 1. If it's +1 it means the prices of the two instruments move in the same way, where -1 means they move in exactly the opposite way and 0 means no linear relation.
This graph shows the correlation between the classes for a decade. Note that the correlation is now close zero, meaning that gold will be a excellent way of diversifying.
"Why is gold good money? Because it possesses all the monetary properties that the market demands: it is divisible, portable, recognizable and, most importantly, scarce - making it a stable store of value." -Ron Paul.
May 2018: Ron Paul warns for market meltdown, advises to buy gold
If you are aware of the applications of gold, you now understand that the demand for gold will likely increase in the future. That while the offer - logically - will not rise and even seems to decrease. Those looking for a graph of the gold price in recent years see a very nice upward trend. Incidentally, it is a mistake to take this rise absolute; it is not just the value of gold that rises, it is above all the value of fiat money that goes down.
While multiple payment systems have not stood the test of time, gold has been an excellent currency for thousands of years. Gold is known for its value retention and is therefore a godsend in these turbulent times. The extreme inflation in Zimbabwe, for example, led to people no longer accepting their own currency, only gold and silver.
In 2018 the government there announced the plan to reintroduce a gold-backed currency. Money can be printed, gold not so much.
For years now, the Chinese government advises its citizens to buy gold because they anticipate where the dollar can go. When the money system would collapse (unlikely, but not impossible) we probably fall back on gold and silver. A nice read on this topic is The Big Reset:War on Gold and the Financial Endgame. Central banks of for example Brazil, China and Russia have been buying a lot in recent years to increase their gold reserves and thus strengthen their financial position in relation to the West.
Gold is pretty scarce. The infographic below shows the total amount of gold that is currently mined. If you would melt all that gold into a solid cube, it would only be 20.5m wide. The tiny ball of gold, in front of the couch, weighs 1 metric ton exactly and would cost around 50 million dollar.
'Paper gold' consists of derivative products with gold (delivery) as underlying. This could be swaps, warrants, options, futures and exchange traded funds. In the futures gold market very little gold actually changes hands: $360 billion of paper gold is traded per month, but only $279 million of physical gold is delivered. That’s a 1,000-to-1 ratio. (source). The existence of this inflated paper market also lead to some blatant price manipulation.
Owning a stock in a gold mining company doesn't mean you own gold. Owning a gold ETF does not mean you own gold. Getting your hands on the actual physical gold is the only method to really own gold. If the financial system collapses and the gold prices shoot up it is very likely that a lot of the 'paper gold' will be worthless.
The little piece of gold I hold here in my hand is exactly one troy ounce, or 31.1 grams.
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