Great Advice for First Time Gold Buyers
You’re worried about where your portfolio is going. Poor stock market performance, low bond yields, and concerns that a recession around the corner are motivating investors to look beyond the usual financial markets and find somewhere safe to put their money.
There are a few safe havens investors use during recessions:
- Core sector stocks like General Electric or Coca-Cola
- Real estate
- Safe haven currencies
- Precious metals like silver and gold
Silver and gold work well as crisis assets, but they’re also investments you should have in your portfolio at all times. They’re inflation hedges as well as a way to balance the risks of owning company shares.
For the first-time buyer, gold can seem complicated. Before you buy gold bullion, you probably have a lot of questions:
- Why is gold valuable?
- What influences gold prices?
- Should you believe claims about future prices?
Table of Contents
How the Gold Business Works
Why Gold Has Value
Gold is a very rare and durable metal. It’s an unreactive element, it doesn’t really tarnish, it is easy to smelt compared to other tough, durable elements, and these qualities made it ideal as an early currency.
Since ancient history, gold has been synonymous with value, and has formed the basis of currencies. Globally, currencies have only given up versions of the gold standard since the 1970s. Before that, the US dollar underpinning the global economic system was gold-backed. It’s only fairly recently that gold effectively stopped being money, but investors still believe in its value.
How Are Gold Price Determined
Supply and demand drive spot prices, and prices are defined by multiple markets. These include:
- Multiple over-the-counter markets (OTC) in London, New York, Dubai, and others. London is the primary OTC market; they facilitate trading between miners, jewelers, bullion banks, central banks, and ETFs.
- The London Fix, which sets a benchmark price for gold.
- Gold futures markets.
Who’s Buying Gold?
Demand for the metal comes from several sources. Here’s who’s buying it:
- The jewelry industry, which consumes 75% of newly mined gold;
- Electronics, medical, space, glass, and other industries;
- Central banks who hold national reserves and turn precious metals into coins and bars;
- ETFs and other institutional investors;
- Individual investors.
Is There a Gold Shortage?
The metal is relatively rare on Earth, and like every metal, there is a finite amount available on the planet. At some point, it’s feasible that no more of it will be extractable without mining operations in outer space.
But for the time being, technology has made mining easier than ever before in history and production has tripled since the 1970s. However, mining only accounts for 75% of the annual supply; the rest comes from recycling a mixture of jewelry and technology. About 90% of recyclable metal comes from jewelry, and another 10% from technology. High prices tend to encourage recycling.
Those are the basics of the industry. You can buy precious metals online if you feel like you’re ready to invest. Gold is a reliable asset in times of uncertainty.