Investments in Gold – Chapter 14: The Motivations for investing in Gold

This is chapter number 14 out of 15. Read the rest:

Read Investments in Gold – Chapter 1: Introduction
Read Investments in Gold – Chapter 2: Advantages of investing in Gold
Read Investments in Gold – Chapter 3: Disadvantages of investing in Gold
Read Investments in Gold – Chapter 4: Guidelines for Investing in Gold
Read Investments in Gold – Chapter 5: Investments in Physical Gold
Read Investments in Gold – Chapter 6: Bullion Bars and Coins
Read Investments in Gold – Chapter 7: Numismatic and Semi-Numismatic Gold Coins
Read Investments in Gold – Chapter 8: Gold Certificates
Read Investments in Gold – Chapter 9: Allocated Accounts
Read Investments in Gold – Chapter 10: Paper Gold Investments
Read Investments in Gold – Chapter 11: Gold Stocks
Read Investments in Gold – Chapter 12: Gold Futures
Read Investments in Gold – Chapter 13: Technical Analysis

There are many reasons why people invest in gold. The reasons and ways which people choose to invest in gold will depend very much on their objectives or motivations towards buying gold. They range from wanting to trade in gold, speculate in gold, as a means of investing or just to save for a rainy day.  Holding gold in a portfolio has several advantages like gains from investment, speculations, risks management from the uncertainties of life or just for the preservation of generational wealth.

The customary rule in the theory of asset allocation, as represented by a pyramid, is that higher risk holding should be placed at the top of the pyramid. On the other hand, lower risk assets ought to be placed at the bottom of the pyramid. As such futures contracts, options and newly emerging mining companies should be at the top of the pyramid. Cash or its equivalents or fully allocated gold accounts should be the foundation of the pyramid. 

Savvy investors have long recognized that gold or its related investments are sound investments for any properly diversified portfolios.  In times of political upheavals like wars or economic crisis like depressions and recessions, gold prices have remained relatively stable. Investors must always take a holistic approach towards their portfolios because gold or its related investments will always be an important part of any portfolio.

For the last five hundred years, gold and silver share a similar history. Like gold, silver up to the 20^th century was used a legal tender. However since then, its role as a monetary standard has faded into oblivion. Central banks throughout the world no longer stockpile silver in their vaults. Likewise if the present gold reserves of the world’s central banks are be released into the open market, this will depress the price of gold and as a result gold will also suffer a fate similar to that of silver.

History has shown that it is extremely difficult for the world to operate under a monetary system backed by gold or silver because the demand for gold or silver are determined by factors other than monetary requirement. The market price and mint value will always be at odds when precious metal like gold or silver are used as a monetary standard. Artificial adjustments between the mint value and market price have also shown to cause imbalances in the economies of countries trying to do that. History has shown that precious metals just cannot soak up the distortion between supply and demand when they are used as a monetary standard. 

Read Investments in Gold – Chapter 15: Conclusion