Over time, almost everything has changed, politically, economically, culturally, or socially, yet there is one thing that hardly changes in value: gold.
Gold is not edible, nor can it heat your house. However, whenever investors feel a change in the global economy, the demand to buy gold will increase.
Have you ever wondered why when something happens such as political conflict, economic recession, or war, people look to gold as a reserve and defensive asset? So what is this exotic metal and what magical properties does it have?
As exchange and reserve assets:
Firstly: Gold is a precious metal literally:
The homogeneity of gold is very high. That is very convenient in measuring and expressing the prices of goods in the process of exchange. Gold is relatively pure, does not change over time, is easy to distinguish and appraise thanks to its characteristic color, plasticity, sound on impact, high density, so it can be used as a reserve asset for hundreds or even thousands of years without losing value.
And most importantly, gold is precious because the culture respects gold. People have treasured gold since ancient times, from Egypt, China, India, or Native Americans. Temples, statues, dowry, self-protection, accumulated wealth, treasury, or personal jewelry are using gold. People can even kill each other to take gold. Gold is an item that traders choose as a measure of value – it has been chosen since time immemorial as a form of money and a reserve asset.
Secondly: Easy to divide without affecting its inherent value:
This is a feature that most of the other asset classes do not have. With its plasticity, gold can be cast into coins, pressed into compression, into ingots… for use in exchange or reserve.
And if after splitting, we can easily melt the gold to recast it into ingots. This feature is very suitable for the use of gold as a medium of exchange because one can easily subdivide gold to match the value of the item you want to exchange.
Thirdly and the most important: Intrinsic value does not change:
Unlike other commodities, almost everywhere the value of gold is the same and is very precious. This makes buying and selling goods much more convenient than previous intermediaries.
Moreover, since a small amount of gold in volume and weight can represent the value of a large number of goods, it becomes much easier to carry gold as a medium of exchange.
Gold is a solution to avoid the risk of inflation
Gold is the earliest form of money in the world, appearing long before paper money was invented. Until now, the price of gold was usually quoted in USD and fluctuated inversely with the price of this currency. The reason is that as the value of the dollar increases, the amount of cash needed to buy an ounce of gold will decrease.
Gold is also seen as a good hedge against inflation risks because rising costs of goods and services tend to erode the value of the USD.
As central banks print more money as part of an effort to stimulate the economy, some may fear this could lead to inflation, which affects the value of other assets.
Meanwhile, gold for a long time tends to hold its true value so it can be considered a safe solution to this risk. But you should also note that the historical price of gold is also as volatile as the stock market and sometimes quite dramatic.
“Old gold” and “new gold”
With the tremendous growth over the past 10 years, many people have expected bitcoin to replace gold as a “new gold,” a safe-haven channel that is not subject to much impact, can be stored and exchanged without loss of value.
Bitcoin supporters use words like “digital gold” or “reserve currency of the future” to refer to this asset. Bitcoin is also resistant to paper currency devaluation and inflation. This is quite similar to the characteristics of gold.
However, gold has a history of at least 2,500 years being accepted and used as a medium of exchange globally.
Compared to Bitcoin, the gold market has great depth and liquidity.
he total amount of physical gold held by investors and central banks amounts to about $3.7 trillion, seven times the market capitalization of Bitcoin.
And most importantly, gold is an asset that exists physically and is physically deliverable. Meanwhile, cryptocurrencies exist only on the blockchain. And there are some people who only feel completely secure when they can hold, hold and touch their reserve assets.
So is gold better or bitcoin better? It can be said that Bitcoin can not replace gold at the moment, but both make sense in portfolios. Economic uncertainties caused by the Covid-19 pandemic, low interest rates by central banks, and volatility in equity markets should help boost assets like gold and Bitcoin. Because they are not bound by economic fluctuations and government policies.
Should I buy gold now?
Just on April 14, Bitcoin set a record when reaching 65,000 USD. After that, the price of this digital currency did not fluctuate too much until the bloodbath on May 19. At 9 a.m. New York time, Bitcoin was priced at $30,016 per coin, down 54% in five weeks.
In the next 4 hours, it increased again. But a recent JPMorgan Chase report shows that for the first time in six months, hedge funds are moving money from Bitcoin to safer channels like gold.
At this point, investors are starting to believe that it’s the best time to buy gold because so many people have turned away from gold that has caused the price to drop a lot and you can buy it at a bargain price. Then, just wait until the wind changes, the gold market is jubilant again and the price will go up.
There are two reasons why the price of gold will rise further.
First, precious metals are a “traditional shield” against inflation, and inflation is trending back.
Inflation in the US in the first week of May 2021 increased to a shocking level of 4.2%, much higher than the forecast of 3.6%. Inflation in the US is likely to rise even higher after President Joe Biden unleashed another $6 trillion in economic stimulus.
Second, the price of gold usually rises when the stock market crashes. The S&P 500 index of leading US stocks crossed 4,000 for the first time in early April but is now considered too high as data on job growth in the US disappointed and threatened. Inflation will increase even more.
In general, there is one truth that never changes. That is, keeping some gold in your portfolio provides psychological comfort during times of market stress. Most advisors recommend keeping 5 or 10% of your total assets invested in precious metals.
Gold doesn’t sparkle right now, but so it’s an ideal time to buy, especially if you want to hold it for the long haul.