Does it still pay to invest in gold?

Investors can invest in gold through exchange-traded funds (ETFs), buying stock in gold miners and associated companies, and purchasing a physical product such as coins or bullion. They usually have as many reasons for investing in the precious metal as they do methods to make those investments.

Some argue that gold is a relic that no longer holds the monetary qualities of the past. In a modern economic environment, paper currency is the money of choice.

Critics contend that gold’s only benefit is the fact that it is a material used in jewelry. On the other end of the spectrum are those who assert that gold is an asset with various intrinsic qualities that make it unique and necessary for investors to hold in their portfolios.

In the end, economists and market professionals view gold as a portfolio diversifier and potential hedge against inflation. Gold may also be a safe-haven asset when the economy turns sour and the prices of stocks and bonds suffer. In the end, whether to invest in gold will depend on your individual circumstances and market outlook.

To fully understand the purpose of gold, one must look back to the start of the gold market. Gold’s history in society began well before even the ancient Egyptians, who started forming jewelry and religious artifacts. Yet it wasn’t until around 560 B.C. that gold started to act as a currency.

At that time, merchants wanted to create a standardized and easily transferable form of money that would simplify trade. The creation of a gold coin stamped with a seal seemed to be the answer, as gold jewelry was already widely accepted and recognized throughout various corners around the Earth.

The United States continued with this gold tradition by establishing a bimetallic standard in 1792. The bimetallic standard simply stated that every monetary unit in the U.S. had to be backed by either gold or silver. For example, one U.S. dollar was the equivalent of 24.75 grains of gold. In other words, the coins that were used as money simply represented the gold (or silver) that was presently deposited at the bank.

However, this gold standard didn’t last forever. During the 1900s, several key events eventually led to the transition of gold out of the monetary system. In 1913, the Federal Reserve was created and started issuing promissory notes (the present-day version of our paper money) that could be redeemed in gold on demand. The Gold Reserve Act of 1934 gave the U.S. government title to all the gold coins in circulation and put an end to the minting of any new gold coins.

Even though gold no longer backs the U.S. dollar (or other worldwide currencies, for that matter), it still carries importance in today’s society. It is still critical to the global economy. To validate this point, look no further than the balance sheets of central banks and other financial organizations, such as the International Monetary Fund (IMF).

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