Enticing, Alluring Gold: Three Myths about Investing in Gold
Very few investments hold the same lure that gold does. For many people, gold is the ultimate symbol of wealth. Gold stabilized global currencies for many years. Most currencies do not peg to the price of gold any longer. Many banks continue to hold large amounts of gold left over from the days of the gold standard.
Despite its glamorous aura of luxury, gold is an investment-grade commodity. Traders buy and sell gold on exchanges just as they buy and sell wheat, corn, oil, gemstones, livestock and other precious metals. The difference is that gold is much more fun and exciting than soybeans.
Very few gold investors have physical stockpiles of gold. Most own shares in gold trading exchanges. Even though they don’t often have the actual gold, the allure of gold continues to fascinate investors. Other people hold back because of a few myths about gold. Here are a few facts about gold investing that explain some of the appeal and debunk a few of the most common myths.
Myth: Gold is Not a Hedge against Inflation
Some investors think gold is not a safe investment. They believe that gold prices are likely to go through wild swings in times of economic uncertainty.
Central banks hold large stores of gold. The amount of gold in storage greatly exceeds the amount in circulation. If these central banks ever released their gold stores to the market, the result would be chaos and rapid inflation. This is the reason many people hold back from buying gold.
Reality: Releasing government stores of gold could cause a large drop in its value. However, this is unlikely to occur since most governments would want to resist the greater economic problems it would cause. Investments in gold and precious metals are safe.
Many investors think of gold as a safety net protecting them from the effects of inflation. In economies that suffer from rapid inflation, gold often keeps its value better than the official currency does. The stable value of gold enables stable trading in those countries.
Some investors buy positions in gold and take an opposite position in USD. This creates a buffer for currency swings. Gold’s stable price makes it a good option to counter unexpected currency changes.
Science fiction stories often show gold as the basis of trade after disasters like an alien invasion or a zombie uprising. Some gold investors also believe that gold would emerge as the preferred basis of trade in any type of global disruption. As a result, they feel more comfortable with at least some portion of their holdings in gold. They believe that gold is an important part of their holdings. Gold provides balance and safety.
While gold prices do change, the trend over the years is always positive. Gold generally holds its own against inflation.
Myth: It’s against the Law to Own Gold Coins
In 1933, President Franklin Roosevelt signed a law that made it illegal to hoard gold. He hoped to increase the amount of currency available during the Great Depression. As a result of this myth, many Americans still believe that it is illegal to own gold in any form except jewelry.
Reality: The law changed through the years. In 1964, changes allowed people to own gold certificates. Americans still could not own large amounts of the metal. Most investors even today actually own shares in a gold exchange. They do not take possession of the metal itself
President Gerald Ford repealed the law in 1974. Once again, Americans could legally own gold. Until 1977, it was still against the law to use gold as a currency in a contract. Now there are no regulations restricting American ownership of gold coins.
Myth: An Economy Based on Gold Is More Stable
Some people believe that an economy based on gold is more stable than one based on paper. They believe that government would be less able to tinker with an economy based on gold. Backing paper money with gold would keep inflation in check. It would also create stable prices. A return to the gold standard would mean a healthy economy.
Reality: There is not enough gold in the world to support economies at their current size. Basing the U.S. economy on gold would cause a painful contraction that would make the Great Depression look like a garden party. This means that central banks are not likely to release their stock of gold. Gold is a safe investment.
In a modern economy, most currency is little more than ones and zeros stored on hard drives around the world. Moving away from a gold standard has allowed most economies to expand rapidly. Gold obeys the laws of demand and supply. It has become an investment rather than a political tool.
People have desired gold for centuries. Gold coins and golden works of art are a feast for the eyes. We celebrate great love by showering our loved one with gold rings and adornments. Gold is beautiful. Gold is satisfying to hold and to touch. Yes, gold is a commodity. Gold is subject to price changes. It is also a practical and sensible investment.