What are the reasons for buying gold?
Gold has been recognized as a common “currency” for a long time. It is able to maintain your purchasing power and reduce the impact of inflation. Gold can also be used for hedging against risks, finance and insurance. In the human civilization, gold has always been the ultimate currency and the most important tool to keep value. In times of crisis, gold is preferred by both investors and central banks. With the uncertainty and financial stress of the world market, physical gold has become a currency of excellence once again. It is now worthy of consideration on buying gold bars or ingots more than ever.
Physical gold is a limited tangible asset that is divisible, replaceable, relatively scarce, difficult to mine, indestructible and cannot be synthesized or devalued. It is easy to carry and store, with a high value-weight ratio. Gold is free of counter-party risk or default risk as it is not issued by any central bank, government or bank. Therefore, it is an ultimate asset for alleviating risks. Above all, the purchasing power of gold will be maintained over time. That’s why it is trusted as a currency all the time. Substantially, gold reflects the ultimate reputation of the ultimate currency.
Gold for keeping value
The purchasing power of gold is expected to be maintained in the future, despite of the general rise of commodity and service prices. In other words, an ounce of gold today can be used to by an approximate quantity of commodities as before. That's why gold is the ultimate asset to keep value and a hedge against long-term inflation. On the contrary, banknotes/legal tender may lose their purchasing power until they are worthless. Compared with legal tender/banknotes, gold is a superior form of currency.
In practice, the purchasing power of gold is constant within a long period. This is known as the “gold constant”.
The gold price is fluctuating with the general price level, so that the value of gold can be kept. For this reason, the financial market and central banks pay close attention to the gold price as a signal of future inflation (sometimes called inflation expectation). That’s why the gold price is often referred to as the barometer of inflation.
Gold as safe haven
Gold is an effective tool to alleviate risks and protect your wealth because it acts as a safety net in times of monetary crisis and inflation. The price of gold always rises in times of financial or economic stress simply because people have transferred some of their wealth into gold. The basis for transferring wealth into gold is the past experience. When the market is volatile, both counter-party and default risks of most other assets increase dramatically while gold is still recognized as an asset free of counter-party risk or default risk.
Therefore, gold plays a role of financial insurance against economic crisis, geopolitical risk and systematic financial risk. In practical terms, in case of extreme economic events such as malignant inflation and monetary crisis, people tend to choose physical gold bars and gold coins with small denominations, because these gold bars and coins have a high value-weight ratio and are easy to carry and store.
When the value of legal tender falls to zero, its value remains unchanged.The gold market is also highly mobile. During the financial crisis, when the counterparty and default risk related to other financial assets became more acute, this liquidity problem of gold also became particularly prominent. Physical gold can also hedge against the inherent depreciation of legal tender. This is because the supply of physical gold is limited and cannot be depreciated, while the legal tender usually depreciates due to inflation and expansionary monetary policy. This currency hedging feature of gold can be seen by observing the continuous depreciation of the US dollar since April 1968, when the gold price of the US dollar was only US $35 / ounce.
