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Gold is an important part of the modern investment portfolio. Because it typically behaves differently than stocks and bonds, gold can function as a diversifier, thereby reducing overall portfolio risk. In addition, gold is used as a hedge against inflation and currency devaluation, roles that have become even more important in recent years.

Physical gold vs. paper gold

Many gold investors prefer buying physical gold to so-called paper gold. Physical gold is the thing itself, usually in the form of gold bars and gold coins. Paper gold products like gold-based ETFs or gold mining shares are more like promissory notes representing gold or the possibility of future profits based on gold.

Buyers of physical gold prefer it because they want the asset itself in their possession. Paper gold always runs the additional risk of default. At AGE, we deal only in physical metals for just this reason.

Gold bullion

Modern bullion coins like American Gold Eagles, Gold Buffalos, and Gold Krugerrands are an easy way to buy physical gold for individual investment, surpassing gold bars in popularity. Gold bullion coins are small, easy to transport, and extremely difficult to counterfeit. A handful of official government mints produce gold bullion coins, selling them to investors through gold dealers at typically small premiums. They include: Perth Mint of Australia, Austrian Mint, British Royal Mint, Chinese Mint, Royal Canadian Mint, South African Mint, and United State Mint. American Gold Eagles, made by the U.S. Mint, are the most popular gold bullion coins sold in America.

Pre-1933 gold coins

Classic gold coins are a popular alternative to modern gold bullion coins for bulk gold investors. These are coins that were minted by governments for circulation long ago, back when gold was still money. Pre-1933 US gold coins, European gold, and World gold coins dominate this market. Many, especially classic European and World gold coins, trade at prices very close to their underlying gold melt value. Others, like scarce US gold coins in higher Mint State grades, trade at sizeable premiums over gold melt.

Pre-1933 gold coins offer advantages over modern gold bullion coins. They are old, historic, and collectible. Perhaps more important, they can be quite scarce, especially compared to modern gold bullion coins, which means they can increase in value at a faster rate than bullion.

The scarcer the coin, the greater its premium over gold melt value. In a rising gold market when demand really heats up, scarce coins typically appreciate by more than common coins, supplying additional leverage to the rising gold price. Modern gold bullion coins are made in virtually unlimited numbers each year and offer no premium for scarcity.

Gold as wealth

Gold has been synonymous with wealth and status throughout human history. From ancient times right up to today, gold has been at the center of economic and cultural life in virtually every major civilization.

Why has gold been so universally valued for so long? To begin with, gold is rare and beautiful, with a lovely yellow color and lustrous glow. Gold does not tarnish or degrade, so it embodies a kind of permanence in a changeable world. Yet, paradoxically, gold is also soft and malleable, so it can be remade into an endless variety of forms.

Gold can be drawn into wire, hammered into thin sheets, fashioned into jewelry, or sculpted into figurines. In modern times, because of its high electrical conductivity, gold is used in many industrial applications. Perhaps most important, gold is easily stamped into coins, making it ideal for use as money.

Gold as money

Until the Mid-20th Century, monetary systems were based on gold and, to a lesser degree, silver. Simply put, gold and silver were money. In most cases, the value of gold by weight was fixed by law. The value of gold currency was therefore determined by the amount of gold it contained.

For example, United States $20 "Double Eagle" gold coins minted from 1849 to 1933 have a gold content of .9675 ounces and a face value of twenty dollars. The price of an ounce of gold during this time was fixed by law at $20.68. Multiply this gold price ($20.68) by the gold content of the $20 gold coin (0 .9675 ounces), and the result is the face value of the $20 gold double eagle.

The gold standard

Until the early 20th Century, the U.S and many Western nations were on the gold standard, meaning even paper money was theoretically redeemable for its face value in gold. Paper currency had value because it was backed an equal amount of gold. Great Britain, which had been the world's pre-eminent economic powerhouse since the 18th Century, gave up on the gold standard in in 1931. The U.S. abandoned the gold standard in 1971.

Today, our currency is merely symbolic. Rather than gold or silver, paper and non-precious metals are now the substance of our money--along with government promises. Copper pennies aren't even copper anymore, but mostly zinc. Governments now decide what money is worth (so-called "fiat currencies") and there is not enough gold to back it all.

Gold and central banks

While gold is no longer the backbone of the world's monetary system, it still plays a crucial role. The central banks of most nations hold gold as part of their currency reserves. Over the past ten years, in fact, central banks have been adding to their gold holdings at the fastest pace in many decades. Why? For the same reason savvy investors add gold to their portfolios: to hedge against the devaluation of paper money, whether by inflation or the arbitrary actions of governments.

Gold and currency risk

After the global financial crisis of 2008 and 2009, governments began massive campaigns of monetary stimulus to get the world economy back on track. Central banks have flooded monetary systems with cash via low or negative interest rates and quantitative easing, which is tantamount to simply printing money.

This huge increase in the money supply is often viewed as raising the risk of currency devaluation and long-term inflation--when there is more money in the system, it becomes less valuable. Because gold is considered a long-term store of value outside of the paper money system, it is used by individual investors and central banks to offset the risk of currency devaluation and inflation.

Gold's value remains intrinsic, so it is ultimately independent of "fiat currencies." For central banks as well as individuals, gold can act as portfolio insurance during times of turmoil or inflation. In this way, gold is the currency of last resort, beholden to no one for its value.

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Last Updated: 10/20/2017
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