Let's start with the fact that gold has its place in the economy since the times of Ancient Egypt. Then they were exchanged as a full-fledged currency. The end of the 19th century until the beginning of the First World War is called the Golden Age in world finance. Paper notes at that time were only a certificate of the presence of gold.
In 1971, US President Richard Nixon depegged gold from the US dollar, which ended the Bretton Woods monetary system. Since then, gold has ceased to be a currency, but has remained a stable investment asset. If earlier, basically, our grandparents just bought gold jewelry, today there are much more options for investing in gold.
- Gold is limited. That is, it cannot simply be printed like a currency.
- Significant historical base. Gold has long occupied a stable place in the economy.
- Government vaults and central banks are an important source of demand for gold.
- Inflation protection. There is a confirming example here.
- From 1973−79 average annual inflation in the US reached 8.8%. In these 6 years, gold has generated an exceptional 35% ser. per annum. But there are also conflicting examples, and very recent ones: the CPI (consumer price index) in the US has increased significantly over the past year, while the price of gold has decreased by almost 5%.
- Negative correlation with the S&P 500 index (500 largest US public companies). What does it mean? There are periods when stocks fall - gold rises, and vice versa.
What types of gold can be invested in?
- Physical - coins/ bars /powder.
- Bank metal account.
- Instruments in the capital market (exchange-traded funds, shares of gold mining companies).
Features of investing in gold in coins/bars:
- Regarding coins: the price on the market depends not only on the cost of the metal, but also on their subject matter, circulation, quality of minting. Therefore, the price of gold can rise, while the price of coins remains unchanged.
- If the bars or coins are damaged, then it will be difficult to sell them. Then they leave at a discount. And this is the risk of losing a large part of the invested funds.
- The price of 1 g of gold depends on the weight of the ingot: the smaller it is, the more expensive the price of a gram. And therefore - the most expensive gold in a bar weighing 1 gram.
- Liquidity. Some banks sell gold but don't buy or don't want to buy back bars that weren't bought from them.
- Spread. This is the difference in price between buying and selling a bullion. Commercial banks set their own rates. And the spread on gold bars is big.
As you can see, physical gold poses many threats to investor returns, so there are significant benefits to investing in gold in the stock market.
