Buying gold is as an excellent way of diversifying a portfolio by investing in an asset that retains value and protects wealth.
This allows you to control the amount of risk you take on other, more volatile investments, such as stocks and shares.
Gold counters inflation, deflation, economic uncertainty, geopolitical risks and problems with fiat currencies. However, what makes gold such a safe haven investment?
Here are five features of the precious metal that continue to attract investors looking to optimise their portfolios.
1. Rare and limited supply
Physical gold is a rare commodity that has a finite supply – a characteristic that makes it intrinsically valuable.
Typically, this means any price drops in gold are unlikely to last for an extended period of time. This is because the value of gold must stay above production costs, otherwise miners will move to higher-priced commodities.
However, when supply dwindles, production becomes viable again due to gold’s limited availability boosting its value.
2. Non-perishable
Investing in gold ensures you have a non-perishable asset, meaning its quality does not degrade much over long periods of time.
This is a vital feature for a safe haven investment, as you will potentially need to store the precious metal in a facility for many years without worrying about losing quality or value.
Gold is also resistant to chemical reactions, so there is little chance of the metal tarnishing or corroding during the storage process.
3. Not reliant on government backing
Currencies are backed by governments, which means they are closely linked to the financial health of the country printing the money and the economies of powerful nations.
When global economic conditions worsen, governments continue to print an increasing amount of currency to cover spending habits, but this reduces its value over time.
On the other hand, physical gold exists outside of the fiat system, so it is not reliant on government backing and is not at risk of becoming completely worthless overnight should there be a global economic meltdown.
4. Stable purchasing power
There is an often-used example to highlight how well gold has retained its value over the centuries.
According to GoldCorp, an ounce of gold allowed you to buy a high-quality toga, with matching sandals and accessories in Ancient Rome. During the Great Depression, you could still purchase a tailored suit with shoes and accessories for the same amount of gold.
Even today, an ounce of gold will enable you to pay for a suit and all the necessary additions. In contrast, a dollar allowed you to buy 10 or more loaves of bread in 1933, while today it is barely enough to purchase a chocolate bar.
5. Sustained demand
Unlike many other assets, gold has maintained strong demand over time and is rarely affected by market fluctuations over the long term.
As currencies and financial markets falter, the desire for investing in gold is only going to increase, which will drive values up.
How likely is it for a currency to collapse? The longest-lasting fiat currency is the UK’s pound sterling, having survived approximately 320 years. However, the average lifespan of a money system is usually around 27 years.
