ETFs (exchange traded funds) and indexed annuities have only existed for a couple of decades. But, gold has a long history that spans back as far as 4,600 BC. Investors have placed a high value on gold over time for its unique and attractive properties.
Over the years, people have also used gold as a bartering tool, and have traded it for other goods and services. Back in 500 BC, people started using gold as a form of actual currency, when Darius the Great, the ruler of the Persian Empire, minted the first gold coin.
In the late 1700s, the Mint and Coinage Act put a fixed price for gold in place that had parity to the United States dollar. At that time, gold and silver coins became legal tender in the United States.
During the Civil War, though, the United States was not able to pay off debt using gold or silver. In 1862, paper money was declared legal tender. This marked the first time that a fiat currency (i.e., one that is not convertible on demand at a fixed rate) was used as an official currency in the U.S.)
Throughout the 1800s, several gold rushes occurred in the United States. At that time, it was estimated that a people could become instant millionaires by owning even a small nugget of gold.
World War l and ll wreaked havoc on the gold standard, so world leaders came together under the Bretton Woods Agreement. This created a gold exchange standard, fixing the price of gold to the U.S. dollar.
Under the Bretton Woods Agreement, the world’s major currencies were tied to the value of gold. This system was referred to as the “gold standard.”
Up until approximately a century ago, many countries around the world used both gold and silver coins as a form of currency. Today, many countries still maintain significant gold reserves.
In order to stimulate the economy after the Great Depression, President Franklin D. Roosevelt was unable to print enough money to pay for his spending program – even by raising taxes. At that time, all Federal Reserve notes (i.e., paper money) had to be backed by 40% gold owned by the Federal government. This means that for every dollar printed, there had to be 40 cents in gold in the bank.
Many people started to withdraw their gold from the weakened banking system when they learned about this requirement. In order to halt the hoarding of gold, FDR declared a national emergency. To further limit gold hoarding, Roosevelt made it illegal to own gold – both in coin and bar form.
Up until 1975, the Gold Reserve Act of 1934 made the possession of gold illegal. In the mid-1970s, when it was permissible to own gold again, investors began using gold to diversify their portfolios and to better balance out market risk.
Why Many Investors Choose to Invest in Gold
Gold is a unique asset. For instance, it is scarce, but at the same time liquid. This asset also offers both positive performance and downside protection when the equities markets go south. As such, gold can play a key role in an investment portfolio.
There are many reasons why investors opt to invest in gold. One of the biggest of these is for its rarity. In other words, as a precious metal, there is a finite and limited supply of it. For instance, gold is considered limited in supply. So, when supply is short and gold is being held by investors, its value – and in turn, its price – will tend to increase.
Gold is also seen as a “store of value” – particularly in times of heavy inflation or deflation. In this case, investors can manipulate the “value” of many other investments and currencies. But gold’s value is based more on supply and demand. Being both tangible and durable, gold can also maintain its value over time, so it is often considered a safe haven for investors.
Investors have purchased gold, for other reasons, too – especially over the past few decades, because of its ability to provide a “safe haven” during times of economic uncertainty. Many investors also mistrust of the current financial system. So, gold can help to alleviate that fear.
The Benefits of Having Gold and Precious Medals in a Retirement Account or IRA
Gold is a precious metal with many practical uses – particularly in the technology industry. For example, NASA uses gold to improve its lasers and to protect sensitive things in space – including part of the visor that astronauts wear.11 Gold is also used in jewelry.
Much of the demand for gold worldwide is for investment purposes, too – especially by central banks. In addition, gold can serve as an alternative to currency, because it is relatively scarce, yet it still has enough mine production to serve the financial sector.
There are many benefits to including gold in your portfolio. These can include:
- Opportunity for growth
- Protection of assets
- Control of investments
- Hedge against inflation
- Maintenance of asset value
Opportunity for Growth
Many investors buy gold because of its growth opportunity. The price of gold can be volatile in the short term. However, this asset has always maintained its value over the long-term. While there are no guarantees, the price of gold has consistently risen over time.
Gold can increase in value when the stock market is down. Due to its history and the investors’ faith in the value of gold, the average gold price also tends to increase in times of recession. This makes gold an attractive investment in uncertain times.
Gold Prices – Historical Annual Data
|Year||Year Open||Year Close||Annual % Change|
|2020||$1,520.55||$1,774.40 (as of July 7, 2020)||16.51%|
Between the end of 2018 and the end of 2019, the rate of return for an investment in gold was approximately 235.75%. This means that a one U.S. dollar investment made at the end of 2018 would have been worth $235.75 at the end of 2019.
Gold has also performed well over longer periods of time. For instance, in the beginning of 2002, gold opened at a price of $278.10. It was valued at $1,523.00 at the end of 2019.
Gold has offered long-term growth potential, too. For instance, it opened at $20.67 in the year 1900. So, it is easy to see that gold provides investors with significant opportunity for growth – particularly if it is held over a long period of time.
Rate of Return of Gold as an Investment from 2002 – 2019
Protection of Assets
While it is risky to hold only one type of asset class, including gold can help to balance out your portfolio. Many investors tend to flock to gold when they are fearful of a falling stock market. That’s because the value of gold will usually increase when assets like stocks are falling.
During the 2008 recession and the 2020 Coronavirus pandemic, investors fear levels were (and still are) high. This is due in large part to being uncertain about when (or if) the world economies will recover. It is during such times of uncertainty that investors buy and hold gold as a safe haven and as a shelter from volatile financial vehicles like stocks.
Central banks will often print more money in an attempt to stimulate the economy. But this can have an impact on other types of assets. But gold tends to hold its value in real terms over time, so it can offer a “refuge” against this risk.
Purchasing different stocks or mutual funds can help you to diversify your portfolio. But, these equities could all still move in the same direction. So, when the stock market is doing well, the total value of these investments can go up. But the opposite can occur, too. So, it is beneficial to add different asset classes like gold into your portfolio to promote further diversification.
One of the biggest keys to diversification in a portfolio is the inclusion of various investments that are not too closely related to one another. In this case, gold generally moves inverse to the stock market. So, if the stock market falls, the price of gold usually will rise. So, adding gold can be a way to at least partially protect you from a market correction.
Control of Investments
Including gold and other precious metals in your portfolio can also provide you with more control over your investments. For instance, instead of being forced to buy only what your bank or financial institution can sell you, you can pick and choose whatever you want to invest in – including gold – through a self-directed IRA or retirement account.
Hedge Against Inflation
Another reason for including gold in your portfolio is to hedge against inflation. Over time, inflation tends to erode the spending power of a dollar. But owning gold can help you with hedging against that loss.
For instance, the price of gold will oftentimes move in the opposite direction of the dollar. So, if the value of the dollar weakens, gold’s value can become stronger, and vice versa.
Maintenance of Asset Value
The value of gold is based in large part on basic supply and demand. When the U.S. and the world economy is volatile, investing in physical assets like gold can help to protect your portfolio’s value, even if the monetary system collapses.
For instance, the share price of a stock could drop to $0, in turn resulting in a total loss of one’s investment. But with gold and precious metals, even if its value falls, an investor still has a tangible asset in hand.
Tax-Deferral / Tax-Free Benefits
When you invest in gold through an IRA account, you receive the many benefits that this type of asset can offer. You can also reap the tax advantages. For instance, funds that go into a traditional IRA account may be pre-tax. This will lower your annual taxable income for the year the contribution is made.
Over time, assets in traditional IRAs grow tax-deferred. This means that there is no tax due on the gain until the time of withdrawal. Depending on how long you hold the funds in the account, this tax-deferral can add up to a large amount of growth.
If you opt to invest in gold through a Roth IRA, your contributions won’t be tax deductible. But, the growth in the account is tax-free. Likewise, you can access your withdrawals tax-free, regardless of what the current income tax rates are. This allows you to use 100% of the funds you withdraw.