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Why Do People Buy Gold?

John-Rothans

Written by John Rothans

Jul 11, 2018

People buy physical gold for many reasons: to protect against losses in other asset categories, for security in times of crisis, and because it's a tangible, liquid, and private asset. Why might YOU buy gold? The choice is yours. Make an informed decision. Learn more as we dive deeper into each of these reasons people buy gold.

Common Reasons People Buy Gold

Protection against paper assets

“Gold is often used as a hedge fund to protect against losses in other asset classes.”

Currency, or cash, is one of these “other asset classes.” While cash may feel secure (after all, it’s something you can see and touch), today’s paper currencies may not be as strong as you’ve been led to believe. That's why many people turn to gold to help protect against currency volatility, in particular, the U.S. dollar’s volatility. The same factors that strain a currency can bolster gold prices.

Currency struggles didn’t end with World War II's wheelbarrows of cash. People around the world are feeling the ramifications of a fragile currency.

Take Venezuela, for example. Basic transactions are practically impossible right now.

“Venezuela’s national currency, the bolivar, has plummeted in recent years amid a crippling economic crisis. Prices are doubling nearly every month and basics such as food and medicine are nearly unavailable,” reports Reuters.

The country's cash crisis is so bad, in fact, that one western Venezuelan city began issuing its own currency.

Then there's India. An unprecedented and unexpected ban on large bills in November 2016 sparked a currency chaos that has yet to be calmed. More than a year later, India still faces a cash crisis, reports The Times. Banks and ATMs are running out of cash. Families are pawning valuables to survive. Indians are fearfully hoarding cash.

Even here in the U.S., the dollar is weakening.

“The rest of the world’s tone is improving while the U.S. is decelerating, and the dollar is reflecting that,” says Mark McCormick, North American head of foreign-exchange strategy at TD Securities.

The same factors that weaken official currencies can do the opposite to gold. And unlike the bolivar, rupee, and dollar, gold cannot be meddled with to suit the needs of struggling banks or economies. Due to its inherent scarcity, gold will always be supported. This precious metal has maintained its purchasing power over long periods of time, and will likely continue to do so for decades, if not centuries, to come.

With this information in mind, does cash seem like the only efficient way to store wealth? Does it seem like an asset class you can trust?

Gold is a safe haven

“It serves as security in times of crises at home and abroad.”

Gold shines wherever there's political, economic, or financial uncertainty.

“Gold shot up to $869.75 an ounce during the 2008 [U.S.] financial crisis,” notes the balance. “The price of an ounce of gold hit an all-time record of $1,895 on September 5, 2011, in response to worries that the U.S. would default on its debt.”

Then on September 11, 2001, an Islamic extremist group hijacked four airplanes and left New York's World Trade Center in flaming ruins. After the attacks, CNN Money reported that “gold soared nearly six percent, or $16 an ounce.”

In 2011, Federal Reserve Chairman Ben Bernanke reportedly said that the price of gold “reflects global uncertainties. The reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”

Gold responds to events outside of the U.S., too. When Britain voted to leave the European Union in June 2016, what did gold do? It skyrocketed. Global gold demand was at its highest level since 2013,” reports The Guardian.

Abroad and at home, there’s a reason gold is known as a safe haven, a standard of wealth, and a safeguard against catastrophe. Time and again, it’s proven itself to be a sanctuary for discerning wealth holders during times of turmoil.

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Gold is tangible

“Many people buy gold because you can hold it in your hand!”

For some people, physical assets like real estate and gold offer greater peace of mind than assets that can't be touched, like stocks, bonds, and mutual funds. Tangible assets offer a unique sense of immediate personal satisfaction, or utility.

Physical assets, like gold bars and bullion, can even represent a higher chance at returns than unseen assets.

The psychological benefits of tangible assets can't be overestimated, either. Unlike bank accounts, stock markets, digital currencies, and even personal identities, gold can't be hacked. It's not vulnerable to cyber theft nor does it rely on the internet.

Unlike so many balance sheets and transactions in today's hyper-digitized world, physical gold is virtually untraceable.

Physical gold can be held in your hand, stashed in your closet, or carried in your pocket. It has been a reliable medium of exchange for thousands of years and has a track record you can rely on. Gold exists in the real world, one that you can see and touch.

Gold is private

“Physical gold provides an alternative savings vehicle held outside of the traditional banking system.”

There's no such thing as a perfect institution, and that includes banking systems. It's no secret. Central banks know this, which might be one reason they've been quietly buying gold for nearly a decade, reports the Official Monetary and Financial Institutions Forum (OMFIF).

Now, “around 20 percent of all the gold ever mined is held by central banks and governments, with the biggest official holdings at the U.S. Treasury,” writes MarketWatch.

Do central banks know something you don't?

“If central banks really had confidence in themselves, i.e. paper money, they would get rid of all the gold in their vaults, sell it all off at high prices and put the proceeds into dollars, euros, yen or what have you,” says David Marsh, a researcher with the OMFIF.

Even with billions in assets, banks of all sizes have a history of going under. In the U.S., eight banks failed in 2017, according to data from the FDIC. Since October 2000, 553 banks have failed.

Gold is a private form of wealth that's both portable and durable. It can be privately accumulated outside of traditional financial institutions, easily liquidated, and traded worldwide.

When you hold physical gold, you don't have to rely on any bank to store and protect your wealth.

Gold is a liquid asset

“Gold is traded worldwide and can be easily converted to cash equivalents.”

Gold transcends barriers. It has no native language, no border constraints, and no expiration date. You can buy gold in one country, then sell it in another. Hold on to it for two days or 20 years. Gold will still be internationally respected and recognized. Few currencies or symbols of wealth share the same economic transcendence. Gold is gold, from China to Canada, Russia to South America.

According to the World Gold Council (WGC), gold trades more than many other major financial assets, including German bonds, UK gilts, and all Dow Jones and S&P 500 stocks.

The market size for physical gold is larger than a variety of stock and bond markets, including the market size of major global financial assets that include Canada, Hang Sang, German bunds, French OATs, Italy, FTSE 100, and UK gilts, adds the WGC.

More practically speaking, consider how long it would take to convert a traditional asset into cash. You'd probably have to wait on a hedge fund manager, real estate agent, or banking associate. The process could be time-consuming and completely out of your control. When you own gold, you don’t have to wait on other people or institutional red tape. Gold puts you in control.

Why will YOU buy gold?

As long as people are buying gold, others will ask: Why? The reason you buy gold may be different than the reason your neighbor buys gold, or for that matter, your grandfather or coworker! A U.S. Money Account Executive can help you see exactly how physical gold can fit into your financial plans. Call 1-844-307-1589 for a free one-on-one consultation today!

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