You will find answers to the following questions:
1. How does gold protect the value of money?
2. What factors make gold valuable?
3. What does gold protect against?
At a glance
- Few assets can be identified that, on the one hand, have thousands of years of tradition as a tool for storing value and, on the other, are still used today by, for example, central banks or investors.
- In principle, there is only one such asset – gold.
- Gold has a number of unique characteristics that can be found today in real estate, cryptocurrencies or government bonds, but only gold contains a full combination of them.
The essential four arguments for gold are: protection of purchasing power, limited supply, hedging against crises and also a form of diversification. This unique combination makes owning at least a small amount of gold a matter of common sense for anyone with their own and their family’s financial security in mind.
Dorota Sierakowska
“Złoto jest coraz łatwiej dostępne, a to ma ogromne znaczenie dla większości inwestorów. Kiedyś złoto kojarzono z pewną niedostępnością, ale przede wszystkim z bogactwem, władzą, luksusem. Ale na szczęście to zaczęło się zmieniać i w tym momencie nie trzeba mieć milionów czy setek tysięcy złotych, żeby mądrze zainwestować w ten kruszec. Możemy mieć nawet kilka tysięcy złotych, kilkaset złotych, a obecnie nawet kilkadziesiąt złotych, żeby zacząć swoją przygodę z inwestowaniem w złoto. To jest szalenie istotne, bo przecież większość z nas chce mądrze ulokować pieniądze, ale wiele osób dysponuje relatywnie niewielkimi oszczędnościami”
Protecting the purchasing power of money
In times of high inflation, prices of goods and services rise. We can buy less with the same amount of money – our money loses purchasing power.
There can be many causes of inflation, but most often it is the result of an imbalance between the money supply and the amount of consumer goods available. When there is more money on the market and the amount of manufactured goods available to consumers remains at a similar level, the prices of these goods rise – fewer goods can be bought for the same amount of money.
The money supply can be increased by adding money, e.g., central banks increased the money supply during pandemics. But it can also be by increasing the amount of money available to consumers through social policies.
In the case of gold, it is not possible to increase its supply so easily. In order for gold to appear on the market, it must first be mined, refined in a refinery and made into bars. These processes involve costs that include inflation (the cost of fuel, electricity, machinery).
100 years ago, you could buy a Ford T or 16 ounces of gold for $300. In other words: a Ford T cost about as much as 16 ounces of gold.
Today, a contemporary Ford model, we can also buy for the equivalent of approx. 16 ounces of gold. But it is no longer $300. Rather, it is an amount closer to $30,000. USD.
This example illustrates how over the century the dollar has lost value against consumer goods and against gold, which has retained its value.
Limited supply of gold
The issue of increasing the money supply in the economy is relatively simple. Since 1971, when Richard Nixon decided to separate the dollar from gold, the newly “created” dollar does not have to be backed by gold. It is solely and exclusively the promise of the issuer.
As for gold, on the other hand, its supply is limited at two levels:
- There is as much gold entering the market each year as there is a certain specified capacity of mines. In recent years it has been 3,400-3,600 t.
- The amount of gold on Earth is finite. There is quite a bit of it, but much of it rests deep, almost at the core, and we will never get to it. The gold we are able to acquire will run out according to World Gold Council estimates probably within the next five decades.
Let’s add some interesting facts:
Industrial exploitation of gold deposits occurred primarily in the 20th century. Two-thirds of the gold mined throughout human history, was mined after 1950.
The deepest mine in the world is actually a gold mine. We are talking about Mponeng in South Africa, where the deepest shafts reach 4,000 meters. The temperature in the lowest parts of the mine reaches 66 degrees Celsius and is cooled to approx. 30 degrees using air-conditioning systems based on suspended ice. The deeper the gold is mined, the more expensive it is to extract.
No major discovery of a large gold deposit has been made in the past decade, despite increasing research expenditures.
There is no prospect that the supply of gold will increase significantly and remain at higher levels for an extended period of time.
Gold as a fuse
Gold, along with the dollar, Swiss franc or Japanese yen, is seen as a so-called “safe haven” asset. safe haven, i.e. an asset with a high level of security. This is due to the fact that its supply is limited and, unlike listed companies, it cannot go bankrupt.
Gold will never become worthless, and its price will not fall below the cost of production, which is constantly rising. Even if in the short term the stock market price of gold records declines, it is known that in the long term it will become more realistic to the markets and the economic situation.
For these reasons, demand for gold strengthens when worse things start to happen in the financial markets or the economy, but also when geopolitical unrest increases. This is reflected in history. Over the past two decades, for example, gold has twice recorded its historic highs: after the 2008 crisis and in 2020, when the COVID-19 pandemic erupted.
This characteristic of gold makes it an ideal “fuse” and is readily purchased by central banks, as well as investors who want to diversify their portfolios.
Gold as diversification
Diversification is the diversification of the contents of a “portfolio” to make it more resilient to the negative effects of events occurring at a particular time, such as rising inflation or economic crises.
For example, having all of our savings in a bank deposit when the interest rate is lower than the rate of inflation causes the purchasing power of our savings to decrease, although nominally we see an increase, and in the end we have to pay capital gains tax (the so-called “Belka tax”).
By dividing these savings in half and keeping one part on deposit and the other in gold, the slow bite of inflation on our savings only affects half the money. The other half is located in physical metal, which we can sell at our convenience at some unspecified time in the indefinite future.
There are no clearly defined divisions as to what portion of savings is worth putting in gold. It will be different for an investor who just wants to hedge against risk, and different for a person who wants to build himself an additional retirement fund or put money aside for his children.
Find out the benefits of buying physical gold
