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Finance From A to Z: Week 7 (G)

Finance From A to Z: Week 7 (G)

What is Gold?

Gold has historically been - and continues to be - among the most effective safe havens for investment across many nations. In fact, gold has long been a favourite among investors, as evidenced by the metal's significant price growth over the last 50 years. The global demand for gold as an investment has increased over a short period of time, commencing in 2001, at an average of 15% annually. It is clear that, as time goes on, what would have formerly been exclusive to the top members of society has become far more commonplace. Consequently, the focus of today's blog will be on the fundamentals of gold as it pertains to finance.

G is for Gold:

Historical Significance

Perhaps the reason why gold has remained so embedded in civilizations throughout history is its durability. Gold has long been a source of intrigue and greed, dominating festivals and celebrations across many cultures. Indeed, from the vaults of ancient Rome to the central banks of modern countries, this gleaming yellow metal has enchanted the people of every continent and era. That being said, if one contrasts the present day with the very distant past, it is safe to say that the number of uses for gold has increased dramatically.

Gold is valued nowadays not just for investments and jewelry making, but also for use in the production of some electrical and medical equipment. Additionally, it is purchased both as a luxury item and as an investment, making it more important than ever for institutional investors.

What, though, makes gold such a desirable investment?

Gold as an asset and diversifier

Due to its low correlation to other mainstream assets, gold appeals to many investors as a diversifier, a hedge against systemic risk, and as protection against sharp stock market declines. In fact, gold is frequently considered to be a good inflation hedge from a fundamental point of view. It is no accident that gold has traditionally enhanced portfolio risk-adjusted returns by generating returns while lowering losses and supplying liquidity to satisfy obligations during periods of market stress. In addition, some people might discover further applications for gold that take advantage of its potency as a hedge against a weakening currency.

How to invest in Gold

There are typically two options available when investing in gold. People can either try to buy actual gold or buy stocks of gold mining companies, units of a gold exchange-traded fund (ETF), or gold futures.

Investors who are accustomed to interacting with the stock and bond markets online may find it difficult to invest in real gold if they choose the first option. In general, buying gold bullion, gold coins, or gold jewelry from gold dealers -- who operate outside of conventional brokerages -- is the only way to obtain actual gold. Additionally, you'll probably need to pay for storage, get insurance for your investment, and make sure the dealer you choose is reliable and trustworthy.

The second option is typically thought to be the most straightforward method of exposure to gold.

A number of avenues exist for investors to get exposure to gold. A much simpler option than purchasing physical gold is investing in businesses that mine, process, and exchange gold. Similar to this, investing in gold mutual funds and exchange-traded funds (ETFs) can give you access to gold's long-term stability while also giving you greater diversity than buying individual gold stocks. The ability to trade options and futures is also available to investors, however, this strategy is undoubtedly the riskiest of those mentioned. It ultimately depends on the individual investor’s risk preference when it comes to deciding which of these many routes to take for investing in gold.

Alternatives to gold

With all that said, it is necessary to acknowledge that while gold holds many uses as a financial asset, it is not the be all and end all. There exist many other options that may fill a similar niche. However, given that all forms of investing carry some level of risk to them, gold is nevertheless a safe bet if an investor is seeking to hedge themselves against inflation and diversify their portfolio for the long-run.

Thanks for reading!

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