Gold’s scarcity and historical use as a store of value make it a unique investment. While its price is influenced by market sentiment, it has consistently preserved purchasing power over time, making it a reliable hedge against inflation and economic uncertainty. Despite criticisms of its lack of utility, gold remains a valuable portfolio diversifier.
Investing in gold – Your shield against uncertainty.
Gold’s reputation as a store of value dates back thousands of years. Unlike paper currencies, which can be printed at will, gold is finite – its supply grows slowly at approximately 1.5% new gold to the estimated existing above-ground gold each year. This contributes to its scarcity and therefore its suitability as a store of value. Over history, many items were used as money (shells, beads, livestock, salt, etc) but as technology progressed, many of them lost the attributes needed to be good money; they were too abundant, or they were perishable, or they were hard to verify. Gold (and silver) persisted.
Silver tended to be used for low value every day transactions, but gold had a superior appeal for large-scale storage of value. While gold had strong credentials as money, the development of banking, credit, telegraph and faster communications, and eventually digital financial systems changed how money worked and introduced new trade-offs. Lyn Alden notes, “We go around on horses … and transact with each other with gold and silver … But with the introduction of telecommunications equipment in the 1800’s … institutions around the world could talk to each other almost instantly. And so … gold was no longer able to keep up with the speed of human commerce.” But gold was still used as a global monetary backstop. Central banks still held gold to back the fiat currency that was used to facilitate trade.
With the end of Bretton Woods, President Nixon removed the need for central banks to hold gold reserves to back fiat currency. Fiat currency is government-issued money that derives its value from the trust and confidence of the people who use it, rather than from being backed by a physical commodity. It can be expanded or contracted by central banks to manage economic conditions. Fiat currency has no intrinsic value. Its value comes entirely from government decree and public trust – people accept it as payment because the government declares it to be legal tender and others agree to use it in exchange.
So should gold have a place in your portfolio? Warren Buffet said “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone from Mars would be scratching their head.” He also said, “I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side … Now for that same cube of gold, it would be worth at today’s market price about $7 trillion … and if you offered me the choice of looking at some 67-foot cube of gold and … you know me touching it and fondling it occasionally .. call me crazy but I’ll take farmland or Exxon Mobil.”
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The valuation quandary of gold is that the price ultimately depends on what others will pay, rather than a cash-flow generation model. The price is heavily influenced by investor sentiment, particularly the emotions of fear and greed. In times of political instability, economic crisis, or stock market turmoil, fear can drive investors towards assets perceived as “safe” – with gold at the top of that list. This flight to safety often leads to rapid price increases as demand surges. The converse is that during periods of economic optimism and booming equity markets, greed tends to prompt investors to shift away from gold toward higher-risk, higher-return assets. In these times, gold prices may stagnate or fall as demand wanes. Thus gold’s value is not only anchored in its physical properties but also in the collective psychology of markets.
A very important quality of gold is that it keeps pace with inflation in a way that fiat currency does not. It has served as a reliable store of value because its purchasing power has remained remarkably consistent across centuries. One ounce of gold bought a fine toga in ancient Rome, a tailored suit in the 1920’s and still buys a quality suit today. The same ounce would have bought a good horse two thousand years ago, a Ford Model T a century ago, and a mid-range car today. The same could be said for education, the price of a house, or even a loaf of bread!
While fiat currencies have come and gone – and lost 95% of their purchasing power in just the past hundred years – gold’s value in terms of real goods has barely changed. It doesn’t multiply wealth, but it preserves it. As an investor Ray Dalio observed, “Gold is like a barometer for the value of paper money.”
Investing in gold offers a unique combination of stability, inflation protection, and a hedge against market sentiment swings. While it may not always generate the spectacular returns of equities during bull markets, its role as a portfolio diversifier and wealth preserver remains unmatched. Whether you are a seasoned investor or just beginning your journey, understanding gold’s properties can help you make informed decisions in uncertain times.
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.
Investing in gold – Your shield against uncertainty.
Gold’s reputation as a store of value dates back thousands of years. Unlike paper currencies, which can be printed at will, gold is finite – its supply grows slowly at approximately 1.5% new gold to the estimated existing above-ground gold each year. This contributes to its scarcity and therefore its suitability as a store of value. Over history, many items were used as money (shells, beads, livestock, salt, etc) but as technology progressed, many of them lost the attributes needed to be good money; they were too abundant, or they were perishable, or they were hard to verify. Gold (and silver) persisted.
Silver tended to be used for low value every day transactions, but gold had a superior appeal for large-scale storage of value. While gold had strong credentials as money, the development of banking, credit, telegraph and faster communications, and eventually digital financial systems changed how money worked and introduced new trade-offs. Lyn Alden notes, “We go around on horses … and transact with each other with gold and silver … But with the introduction of telecommunications equipment in the 1800’s … institutions around the world could talk to each other almost instantly. And so … gold was no longer able to keep up with the speed of human commerce.” But gold was still used as a global monetary backstop. Central banks still held gold to back the fiat currency that was used to facilitate trade.
With the end of Bretton Woods, President Nixon removed the need for central banks to hold gold reserves to back fiat currency. Fiat currency is government-issued money that derives its value from the trust and confidence of the people who use it, rather than from being backed by a physical commodity. It can be expanded or contracted by central banks to manage economic conditions. Fiat currency has no intrinsic value. Its value comes entirely from government decree and public trust – people accept it as payment because the government declares it to be legal tender and others agree to use it in exchange.
So should gold have a place in your portfolio? Warren Buffet said “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone from Mars would be scratching their head.” He also said, “I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side … Now for that same cube of gold, it would be worth at today’s market price about $7 trillion … and if you offered me the choice of looking at some 67-foot cube of gold and … you know me touching it and fondling it occasionally .. call me crazy but I’ll take farmland or Exxon Mobil.”
The valuation quandary of gold is that the price ultimately depends on what others will pay, rather than a cash-flow generation model. The price is heavily influenced by investor sentiment, particularly the emotions of fear and greed. In times of political instability, economic crisis, or stock market turmoil, fear can drive investors towards assets perceived as “safe” – with gold at the top of that list. This flight to safety often leads to rapid price increases as demand surges. The converse is that during periods of economic optimism and booming equity markets, greed tends to prompt investors to shift away from gold toward higher-risk, higher-return assets. In these times, gold prices may stagnate or fall as demand wanes. Thus gold’s value is not only anchored in its physical properties but also in the collective psychology of markets.
A very important quality of gold is that it keeps pace with inflation in a way that fiat currency does not. It has served as a reliable store of value because its purchasing power has remained remarkably consistent across centuries. One ounce of gold bought a fine toga in ancient Rome, a tailored suit in the 1920’s and still buys a quality suit today. The same ounce would have bought a good horse two thousand years ago, a Ford Model T a century ago, and a mid-range car today. The same could be said for education, the price of a house, or even a loaf of bread!
While fiat currencies have come and gone – and lost 95% of their purchasing power in just the past hundred years – gold’s value in terms of real goods has barely changed. It doesn’t multiply wealth, but it preserves it. As an investor Ray Dalio observed, “Gold is like a barometer for the value of paper money.”
Investing in gold offers a unique combination of stability, inflation protection, and a hedge against market sentiment swings. While it may not always generate the spectacular returns of equities during bull markets, its role as a portfolio diversifier and wealth preserver remains unmatched. Whether you are a seasoned investor or just beginning your journey, understanding gold’s properties can help you make informed decisions in uncertain times.
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.