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During the past half-decade, investors have coped with the impacts of a global pandemic, multiple military conflicts, and interruptions of global supply chains. Climate change and political philosophies stoke international tensions and threaten established foreign exchange systems. Technological advances have disrupted industries, altered work customs, and upset traditional investment strategies.
The speed of change continues to accelerate, escalating volatility and risk for those seeking to grow and preserve financial security. Investors are peering through the fog of uncertainty and trying to anticipate the “new normal.” The turmoil of the present environment is unlikely to subside, requiring investors to adjust long-held beliefs and practices about investment types and their inherent risks. Accenture, the global consulting firm, predicts that the future ecosystem will be nothing like the past business as usual but best described as “Never Normal.”
Gold – An Asset Valued for Millenia
Archaeologists found gold decorative objects in Bulgaria dated to 4000 BCE; members of Egyptian royalty were buried in gold-adorned sarcophagi in 700 BCE. Long before the appearance of corporations, gold was the reserve currency of trade between individuals and nations. The quest for the metal spurred wars, explorations across continents and oceans, and was the basis for the global Mercantile economic system underlying international trade for more than two centuries.
Gold reserves backed currencies of the world before the Bretton Woods Agreement in 1944. The currency exchange rates of 44 nations were tied to the U.S. dollar, secured by gold reserves at $35 per ounce. In 1971, President Nixon ended the link between gold and U.S. currencies, creating a foreign exchange system of fiat currencies. Severing the connection between gold and currency enabled governments worldwide to issue trillions of currency units backed by the government’s “promise” that the currency would retain its value. Excessive money in the public invariably ignites periods of inflation, i.e., lowering the purchasing power of money.
The Insidious Effect of Inflation
Inflation is the covert theft of value over time. It is the theft of purchasing power since a dollar tomorrow buys fewer goods than a dollar today. Governments generally favor inflation as long as it is low enough to escape the notice of those most affected. Federal Reserve Chairman Jerome Powell recently announced an “average inflation targeting” to keep inflation within the 2%-3%. The effect of the rate is that a 40-year-old earning $100,000 today must make $128,000 in 1950. Retirees living on $75,000 in 2021 will need to increase their income by several thousand dollars each year to maintain the same lifestyles.
Protecting Purchasing Power
Money is purchasing power, what it will buy now and in the future. Saving and investing are tools to transfer and grow one’s purchasing power from the present to the future. While investing is intended to increase the balance as high as possible, a more important objective is to preserve purchasing power now and in the future.
Investment professionals often advise clients to accumulate a portfolio of shares selected from the 6,000 companies traded on the New York Stock Exchange or the Nasdaq. Others recommend one of the 126,000 mutual funds or the 7,600 ETFs available worldwide. They might advise a buy-and-hold strategy, holding a stock for years, or a technical approach based on the changing emotions of the public affecting prices. Very few discuss purchasing power or the record of their recommended investment retaining its value through negative investment cycles. The ownership of gold is rarely mentioned as an asset to preserve value or to grow purchasing power in periods of inflation, deflation, currency failure, or disruptive technology. A fifty-year review found that gold maintained purchasing power and appreciated at a higher rate than stocks or real estate (A home is the most common form of real estate ownership in America.
7 Reasons to Own Gold
- Universal Acceptance. The yellow metal has been accepted as a medium of exchange worldwide for thousands of years. Gold’s rarity, usefulness, and desirability make it a substance of high value. Governments, individuals, and institutions hold gold investments in the convenient form of coins and bullion.
- Security. Gold cannot be hacked like digital assets, destroyed like real estate, or counterfeited like paper money. It is especially sought during periods of economic and political instability.
- Limited Supply. According to the United States Geological Survey (USGS), 244,000 metric tons of gold constitute the world supply, two-thirds (187,000) produced. Supply increases by about 3,000 metric tons annually (1.6%). All of the available gold produced to date would fit into a 70-foot cube, about one-third of the size of the U.S. Lincoln Memorial. The total gold produced to date is slightly more than 1 ounce per capita of the world’s population (8.6 billion ounces/7.9 billion people).
- Rising Demand. Jewelry manufacturers consume the majority of available gold. The production of forty laptop computers or 832 mobile phones requires an ounce. Asia (China and India) account for almost one-half of the world’s consumption. As international tensions rise, investors will seek gold as a “safe haven.”
- Mobility. Physical gold in coins or bullion is easily stored and transported. One kilo of gold equals 2.2 pounds (32.15 ounces). A single kilo measures slightly more than 3 inches in length, 1.5 inches in width, and .75 inches in depth. At a recent price, a kilo bar is worth over $60,000.
- Confidentiality. Though profits and losses are subject to tax authorities following a buy-sell transaction, the purchase or sale of gold is exempt in most instances. The laws to circumvent money laundering require a single cash transaction or a series of cash transactions within 24 hours for $10,000 or more to be reported to the Internal Revenue Service (IRS).
- Ownership options. Individuals and organizations can purchase and own physical gold directly. Gold can also be bought and held in Self-Directed Traditional or Roth IRAs subject to specific requirements.
Investment Diversification Is Always Prudent
All investments bear a risk that may not be insurable, transferable, or avoidable. For that reason, a balanced investment portfolio includes different types of investment with varying performance characteristics as economic conditions change. A typical diversified portfolio might contain individual securities, mutual funds, bonds, real estate, and gold.
Prices of precious metals typically rise when stock and bond markets are edgy and uncertain, countering a general decline in securities prices. When interest rate yields rise, equity, fixed income, and real estate prices stagnate or decline. At the same time, demand for gold increases its price, thus offsetting securities losses on a portfolio level.
Monica Stankowski, the editor of MarketReview.com, explains the benefits of gold as a hedge against securities losses in a portfolio:
“How this works is that if one has a position in gold as well as in securities, the securities hedge the gold, and even more significant, the gold hedges the securities. So if you are down money in the market, this means that you’ve probably made money on your gold investments, and this helps cushion the blow. When we use such a strategy in advance, for protection so to speak, this is called hedging risk.”
When looking to diversify your portfolio with precious metals, it’s important to work with a company that has years of experience and can be trusted. One such company is Gold Alliance, which was established in 2002 and has an outstanding rating of 4.96 stars out of 5 on the Better Business Bureau.
Gold Alliance is helping Americans diversify their savings with physical precious metals in an effort to achieve financial security. Their philosophy and practice is to do right by their clients and make sure they completely understand and are happy with their choices, and their success is evident in the long list of 5-star reviews. As an industry leader, Gold Alliance has helped shape in many ways how their industry works towards more transparency and better client education.