Since its discovery in California in 1848, gold immediately became a valuable material to many civilizations. If you watch historical movies, you’ll see that gold is usually their basis for wealth. It was only in 1500 BC that people from Nubia made use of gold as a medium of exchange, and in 560 BC, gold finally became a type of currency.
However, fast forward to 1971, the US started utilizing paper money and abandoning gold as a currency. Despite this, gold still holds value today, and although it’s not as valuable as it was several decades ago, investing in gold has a lot of benefits, even to business owners.
Four reasons why a business should invest in gold
Gold as a Powerful Inflation Hedge
As a small business, your purchasing power is limited. One massive loss in your investment and you’re done. That’s why it’s essential to always have a hedge when trading, whether you’re doing forex trading or traditional trading.
You’ll see the term “hedge” or “hedging” frequently if you look into investing, and every investor must know what it means. Generally, hedging refers to the process of minimizing the loss from unfavorable events. If you opt for insurance for your house, you’re basically getting a hedge in the event of a flood.
Hedging in the investing world is pretty much the same. You try to minimize your losses by investing in an asset that has the opposite effect of your original investment.
For example, say you’re investing in US dollars. Since the value of gold is inversely proportional to US dollars, it’s a powerful hedge. If US dollars drop in price, gold increases in price, but the best part is that even if US dollars experience a sudden rise in value, gold still maintains its price.
For this exact reason, many people think of gold as a powerful inflation hedge, making it a perfect asset for long-term investments where inflation can happen at any time. Funding an IRA is an excellent example since you’ll have to wait until your retirement to withdraw your assets.
Gold as a Non-Depreciating Asset
As you may already know, the value of US dollars and other currencies can increase or decrease depending on the situation. Volatility refers to the frequency of changes in a currency’s value. A volatile asset refers to an investment with an ever-changing value. Hence, before investing in a volatile asset, any investor has to carefully consider the risks and rewards.
Usually, the higher the risks, the greater the rewards. US dollar, in particular, is a volatile asset. Its value changes very often, but that’s not the same with gold. Although there’s a chance that the value of gold may decrease, it rarely happens, and the depreciation is negligible. Why?
Throughout history, gold still preserves its value, which just goes to show that this hard asset has low volatility. Since the value does not depreciate, it’s perfect for those who prefer long-term investments or preparing for their retirement by funding an IRA.
Despite its low risks, the good news is that the rewards can be favorable, especially with how gold production is slowly becoming stagnant.
Gold Production is Declining
You must already know the law of supply and demand. It goes like this: As the supply of an object decreases, the demand increases. You can also say that when the demand increases, the price naturally experiences a boom.
Ideally, you must invest in an asset that has a high chance of becoming in-demand. In other words, choose an asset that will become scarce in the future, and that’s where gold comes in.
Since 2008, gold production continues to increase. It wasn’t until 2019 when the gold industry seemingly reached its peak. In other words, 2019 has lower gold production than 2018, and even the production in 2020 also seems to be lower.
These statistics show that the supply is becoming lower, so the demand will eventually increase. By investing in gold early on, you can reap greater rewards.
Gold for Diversification of Investment Portfolio
Once you make a mistake, all your eggs will fall and break, and you’ll have nothing else to cushion the loss. For that reason, most investors try to diversify their investment portfolios.
Diversification is the practice of spreading your investments to different assets, be it soft or hard assets. By doing so, you’re making sure your profit is not limited to one asset. You may lose your investments in stocks; you can still win some from commodities.
Examples of possible assets for investments include:
- Alternative Assets
- Cash Equivalents
- Stocks and Bonds
If you’re trying to diversify your portfolio, gold is the way to go. As a hard asset, its volatility is unique, and you can pretty much consider it a safe haven if things go south. However, investing in gold is not so cut and dry. Timing is also crucial when investing in gold.
When should a business invest in gold?
The highest gold value was around $2,000 US dollars per ounce, which was in August 2020. On the other hand, the lowest price was in 1971, with a value of around $250 US dollars per ounce. Remember that this was also the year when the US decided to use paper money.
As you can see, when the US dollar was performing well, the gold price is meager, but when the value of US dollars was declining, it was also then when gold reached an all-time high.
The point is, a business should invest in gold when other assets are performing poorly, not just the US dollars but also other currencies. If you think their price is declining, then that’s the best time to invest in gold, which rarely depreciates and preserves its value.
Gold Investment Options
Unlike centuries ago, you can choose from different options when investing in gold, such as:
- Mining Stocks
- Futures Options
Of course, even with different investment options, their risks and rewards are pretty much the same. The only difference is how you obtain gold as a hard asset.
Despite the many benefits of gold investments, there are also disadvantages. The same goes for any other asset. It’s essential to look at gold as another one of the assets you can invest in, with the difference of having low risks. To small businesses, gold can be a safe haven due to its low volatility.
Editor’s Note: Any financial information or opinions contained in this article are the author’s own and do not represent endorsement or support of any products or services by SmallBizClub.com.