Why Is Gold So Valuable?

Stocks, bonds, and other securities can test investors' nerves. Many see gold as the opposite of the roller coaster ride of traditional financial markets. According to the World Gold Council, 85% of investors have some gold investments in their portfolios. Why is gold so valuable to these people?

The prevailing opinion among investors is that gold can help hedge against risk. For example, when there is uncertainty in the economy, the gold price usually increases. That's a desirable outcome for people who want to avoid excessive risk.

Unfortunately, there are pitfalls to gold investing. First, investors must sift through many options for investing in precious metals. Choosing the right one can be challenging, especially when buying physical gold.

Here's a look at why and how to invest in precious metals.

What's So Special About Gold?

Several different qualities give gold its value.

•             Scarcity: Gold is a finite product. There's only so much in the world, and mining is expensive and challenging. It's also costly and not readily available to everyone. The limited supply helps gold keep its high price.

•             Demand: Gold is in demand worldwide. Central banks use it to store value, tech companies use it in their products, and jewelers use it to make their creations. This high demand, combined with the limited supply, keeps the price high.

•             No third-party risk: Gold is a physical commodity. When you buy stock in a company, you rely on the company to perform. If they don't, your investment loses value. Precious metals don't have this type of risk. Gold won't fall in value because of the whims of a CEO or a failure to compete with other companies in the industry.

•             Malleability: Gold has a low melting point, so it's easy to turn into coins and jewelry. According to the BBC, this quality was why gold was historically used as a store of value. And it's why people continue to use physical gold as an investment today.

•             Longevity: Gold doesn't decay or get rotten. Physical gold is something investors can hand down to their loved ones for generations.

These qualities explain why gold is so valuable as an investment. However, investors should also understand the economics of gold so that they can grasp the short- and medium-term reasons for having gold in their portfolios.

Why Buy Gold for an Investment Portfolio?

Investors see gold as a safe investment during uncertain economic times. This is not just tradition. Gold actually has a close relationship with currencies and issues like inflation.

•             Gold protects against inflation: During high inflation, currencies like the U.S. dollar lose value. Prices go up, and people can't buy as much as they used to. Gold prices often increase during these times, so investors can buy gold to keep their money from losing value.

•             Gold doesn't have a close relationship with financial markets: Precious metals like gold and silver also often increase in value when stock or bond markets become volatile. If a country's economy is struggling, all stocks in a market will likely lose value, even those of strong companies. Gold doesn't get dragged down in the same way. In fact, it often moves in the opposite direction of markets.

•             Gold is easy to buy and sell: You can buy gold through futures or exchange-traded funds. However, these are somewhat dependent on financial markets because that is where they trade. You can easily sell and purchase gold physically through precious metals dealers.

When you deal with physical gold, it's essential to find a reputable precious metals dealer like Sprott Money to ensure you get the benefits of gold investment.

How to Buy Physical Gold

Investors have three main options for getting real gold: bars, coins, and jewelry.

Smart investors consider the premium when they buy gold. This is the markup above the actual value of the gold. It covers the minting and other costs precious metals dealers pay to get the gold to the buyer. Jewelry has a higher premium because of the cost of designing and shaping the ring, earrings, or necklace. Bars have a lower premium because there isn't much design or shaping involved in their creation. Coin premiums are usually closer to bars, but they can also have costs associated with collectability.

Which Type of Gold Is Right for You?

From an investment standpoint, coins and bars are the best options because of the lower premiums.

Larger bars are more suitable for long-term investments, and coins are more flexible. However, instead of thinking about the shape of the gold, it is better to think about its weight. The lower the weight, the easier it is to sell gold piece by piece. This makes it easier to adjust your portfolio without carrying pound or kilogram bars to the dealer.

Smaller bars and coins come in varieties that are an ounce or less. Not only does this make buying and selling easier, but it also makes getting started in gold investing easier. Investors don't need $100,000 for a 1-kilogram bar. Coins and bars can be as light as 1 gram, putting them in the price range of casual investors who only want to get started on their precious metals portfolio.

What to Look for in a Precious Metals Dealer

Investors need to understand why gold is so valuable. However, the full value is only available for buyers who get authentic gold that meets purity standards. Gold should be 99.9% pure (also written as 0.9999 fine gold).

It should also come from a recognized mint. For instance, Sprott Money offers gold from the Royal Canadian Mint. Respected producers like this engrave their names on coins and bars, and reputable dealers will provide a certificate of authenticity and serial numbers for extra peace of mind. Explore the steps necessary for gold investment with Sprott Money, or contact us to ask about a free consultation.