Throughout history, gold has always been seen as one of the greatest investments one can
make. Currencies come and go even the U.S. dollar would probably be worthless someday
in the future, but gold has never lost its value through millenniums.
Gold is used in a wide range of industries. Some make jewelry out of it; others use it
in the manufacturing of certain electronic and medical devices. And others invest in
it like you probably, since you are watching this video.
As of April 2020, the price of the gold is $1657, significantly higher than it was let's
say 50 years ago ($300).
But the question is, is gold a good investment? Or to be more precise, has gold been a good
investment? Well, the answer isn't really that simple.
Since the abundance of the gold standard, the world has been overwhelmed with paper
currencies. It is even difficult to imagine a world where gold is a currency.
But it has been once upon a time not that long ago. However, the modern financial system
is so complex that we can no longer go back to the gold standard.
But what we want to explore in this video
is, If you have some extra cash in your piggy bank, should buy gold instead of stocks or
even real estate. But Before we answer that question, we have
to understand what drives the price of the gold first.
So, Besides having a unique and beautiful color, unlike other elements. Gold has always
been the most trusted currency. Gold has always been used as a way to pass wealth from one
generation to another to preserve their wealth. Because unlike gold, paper currency has always
been quite worthless in the long run, but gold has maintained its value throughout the
ages.
The U.S. dollar has been the most important currency for the last hundred years. Even
today, countries all across the world have stacks of U.S. dollars in case of emergencies.
But even the U.S. dollar isn't a safe heaven because the value of the dollar falls based
on the actions of the FED and the government. During the margate crises, the economy was
in a deep hole, and the only way the government could save the economy was by injecting trillions
of dollars into the economy to keep the dice rolling again. But that pushed the investors
to buy more gold and doubled the price of the gold in just four years (2008-2012). In
fact, prior to that, between 1998 to 2008, gold prices have tripled.
Historically speaking, gold has proven itself to be an excellent asset against inflation
since its price rises together with the cost of living. In fact, whenever inflation significantly
rises, the price of gold simply soars. And with the modern financial system, financial
crises happen quite often.
But a financial crisis means chaos, and that means uncertainty. When it's not clear where
the economy is headed, people want to feel that their wealth is safe, and that's why
they turn to gold. During any crisis, gold often becomes the safe heaven that investors
look up to. Since, they are confident that, no matter what happens, gold is going to keep
its value.
Even when there is a deflation, when prices are decreasing as it was during the great
depression, gold prices rise.
But that's not all, whenever the public loses confidence in governments, they also tend
to turn their reserves into gold quickly. Because political instabilities can lead to
chaos and financial crises. Gold prices, for instance, grew during this Brexit deal. When
world tensions rise, gold prices usually outperform all other investments.
But one can argue, with all the technological
advancement we have today, what is stopping us from miming more gold and a huge supply
would drive the price down. Well, even with modern technology, it's
not easy to extract gold. Gold mining production has not changed significantly
since 2016. And the main reason for that is, "easy gold" has already been mined; miners
now have to dig deeper to access quality gold reserves. And that is much more challenging
and raises many other problems. Miners are exposed to additional hazards, and the environmental
impact is heightened. In other words, it costs more to get less gold. All these factors add
to the costs of gold mine production and making it less attractive to investors.
Major suppliers of gold in the market since the 1990s have been the central banks, such
as the FED, since Central banks keep gold as one of their significant reserves.
But since the crash of 2008, even the central banks significantly stopped selling their
gold reserves. At the same time, the production of new gold from mines had been declining
since 2000. And bringing a new mine into production can take up to a decade.
Which all led to the rise of gold prices. The demand for gold might decline temporarily
from time to time, but it always rises back because Golden jewelry is part of many cultures,
which means that there will always be a demand even when investors turn to other forms of
investments.
But that hasn't always been the case. Once
upon a time, not that long ago, gold was the international currency of the world and wasn't
only used in the manufacturing of jewelry. I know that its difficult to comprehend that
just a hundred years ago, people actually used gold as a currency.
To understand how did we entirely moved out from gold and are completely depending on
fiat currency. We have to take a look at the history.
For over 5000 years, gold with its scarcity and beauty has captivated humankind like no
other metal.
For the first time, gold was used as solid coins around 700 BC. Before that, gold had
to be weighed and checked for purity when settling trades.
But these coins were not without their problems. They have been used in different shapes throughout
centuries. However, the biggest obstacle was that gold
was simply too scarce, and digging it from the ground was much more difficult given the
technology they had in the past.
To understand how scarce was gold back then. In the 16the century, Spain extracted so much
gold from the New world that it raised Europe's supply of gold by five times.
Of course, paper money was gaining some popularity back then, but gold was still the main instrument
of the monetary system.
But as the world economy started to rely on debt more and more, paper money slowly began
to dominate world economies, but it had its fair share of problems. So the world came
together to create the gold standard at the end of the 19th century (1871).
It actually worked pretty well, inflation was at around 0 percent, and the world found
a common language to trade until the world decided to destroy each and started world
war 1. Even though the gold standard did not collapse, political alliances changed; governments
began to run out of gold, and national debts soared, which pushed the world to move to
something more flexible to base on, the world economy. Especially since gold supplies continued
to fall behind the growth of the global economy, which ended in a few nations holding most
of the gold reserves such as the United States and Britain.
The great depression (1929) made it only worst. War debts forced many countries to abandon
the gold standard. Even England had to get out by 1931.
and guess what happened after WW2, the U.S. had 75% of the world's monetary gold, and
the dollar was the only currency still backed directly by gold. But as other nations began
to rebuild their economies, gold slowly began to leave the United States, especially with
the war in Vietnam. The U.S. Went into a deficit and was afraid that it would run out of gold.
Countries like Belgium cashed in dollars for gold, and many others were intending to do
the same, which pushed the united states to completely abandon the gold standard in 1971,
which was the end of the gold standard. The truth is, although gold has always played
some role of currency for thousands of years. A true international gold standard existed
for around 50 years (1871 to 1914). And today, the price of the gold is determined
by the factors we have discussed earlier. However, the main question remains, Has Gold
Been a Good Investment?
Well, the answer is both yes, and now, it highly depends on the time frame. Sometimes
it outperformed other investments, and other times investing in stocks or bonds would have
been a much better option. Gold might be a solid investment, but its definitely not the
best all the time. If we take a look at the last 15 years, yes,
gold (%278 increase) did actually better than the stock market ( 173%), but if we take a
longer time frame such as 30 years, then the stock market has significantly outperformed
gold. The Dow Jones industrial average has gained ( 839%) while gold only (280%). Even
returns from corporate bonds ($450) have been higher than gold.
However, if we take even a longer time frame, such as since the abundance of the gold standard
( 1971), gold (4,500%) has outperformed the stock market ( 3,221%) by a reasonable range.
Are they going to be a good investment during this crisis, well, its impossible to say,
maybe it might be, maybe not. Only time
will tell.