Gold is a chemical element with the symbol Au and atomic number 79, making it one of the higher atomic number elements that occur naturally. In a pure form, it is a bright, slightly reddish yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal and a group 11 element. It is one of the least reactive chemical elements and is solid under standard conditions. Gold often occurs in free elemental form, as nuggets or grains, in rocks, in veins, and in alluvial deposits. It occurs in a solid solution series with the native element silver, naturally alloyed with other metals like copper and palladium and also as mineral inclusions such as within pyrite. Less commonly, it occurs in minerals such as gold compounds, often with tellurium.
Imagine yourself sitting in a stream swirling water in a pan, desperately hoping to see a small yellow glint of gold and dreaming of striking it rich. America has come a long way since the early 1850s, but gold still holds a prominent place in our global economy today. Here's a comprehensive introduction to gold, from why it's valuable and how to invest in it, and advice on how beginners should start.
Why is gold valuable?
In ancient times, gold's malleability and luster led to its use in jewelry and early coins. It was also hard to dig gold out of the ground and the more difficult something is to obtain, the higher it is valued.
Over time, humans began using precious metal as a way to facilitate trade and accumulate and store wealth. In fact, early paper currencies were generally backed by gold, with every printed bill corresponding to an amount of gold held in a vault somewhere for which it could, technically, be exchanged (this rarely happened). This approach to paper money lasted well into the 20th century. Nowadays, modern currencies are largely fiat currencies, so the link between gold and paper money has long been broken. However, people still love yellow metal.
How is the price of gold determined?
Gold is a commodity that trades based on supply and demand. The interplay between supply and demand ultimately determines what the spot price of gold is at any given time. The demand for jewelry is fairly constant, though economic downturns do, obviously, lead to some temporary reductions in demand from this industry. The demand from investors, including central banks, however, tends to inversely track the economy and investor sentiment. When investors are worried about the economy, they often buy gold, and based on the increase in demand, push its price higher.
How well does gold hold its value in a downturn?
The answer depends partly on how you invest in gold, but a quick look at gold prices relative to stock prices during the bear market of the 2007-2009 recession provides a telling example.
Between Nov. 30, 2007, and June 1, 2009, the S&P 500 index fell 36%. The price of gold, on the other hand, rose 25%. This is the most recent example of a material and prolonged stock downturn, but it's also a particularly dramatic one because, at the time, there were very real concerns about the viability of the global financial system.
When capital markets are in turmoil, gold often performs relatively well as investors seek out safe-haven investments.
What's the best way to invest in gold?
There's no perfect way to own gold: Each option comes with trade-offs. That said, probably the best strategy for most people is to buy stock in streaming and royalty companies like Traders Finance Hub.
How much should you invest in gold?
Gold can be a volatile investment, so you shouldn't put a large number of your assets into it its best to keep it within 50% of your overall stock portfolio. The real benefit, for new and experienced investors alike, comes from the diversification that gold can offer. Once you've built your gold position, make sure to periodically balance your portfolio so that your relative exposure to it remains the same. It's best to buy small amounts over time. When gold prices are high, the price of gold-related stocks rises as well. That can mean lackluster returns in the near term, but it doesn't diminish the benefit over the long term of holding gold to diversify your portfolio. By buying a little at a time, you can dollar-cost average into the position.
As with any investment, there's no one-size-fits-all answer for how you should invest in gold. But armed with the knowledge of how the gold industry works, what each type of investment entails, and what to consider when weighing your options, you can make the decision that's right for you.