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Properties of gold and how to invest in gold
Gold lost about 20 percent of its value in 2018, raising doubts about the quality of investment in gold and the importance of escaping from paper currencies to tangible assets, as a result of the erosion of the real value of currencies due to continuing to be printed by central banks around the world. Is gold, in general, suitable for investment? Is gold still suitable for investment? What are the ways to invest in gold?
With a simple historical review, we find that gold has grown by about 300 percent in the past 15 years, while stocks (represented by the US Dow Jones index) have achieved about 80 percent during the same period, despite gold losing 30 percent of its value this year, Meanwhile, the Dow Jones rose nearly 23 per cent. That is, with the exception of 2018, gold has achieved a growth of more than 450 percent in 15 years, while the Dow Jones achieved growth of about 42 percent during the same period, plus annual dividends of 1 to 3 percent.
Undoubtedly, one of the most important reasons for the rise in the price of gold in recent years is due to the great demand for its acquisition by investors and some central banks who believe that the US dollar is in a state of severe deterioration that will continue for many years, and that there is no room for preserving wealth except through tangible assets, the most important of which is gold. . Despite the negative performance of gold this year, there are many who adhere to the idea of investing in gold and do not deviate from it by an inch, whether its price increases or decreases.
Why is investing in gold attractive?
The idea of investing in gold is based on two assumptions, the first is that the purchasing power of paper currencies is constantly eroding, and the second is that the quantity of supply of gold is limited, so the price of gold always comes at the mercy of the volume of demand, which is expected to continue for long decades. As for the limited quantities of gold, it is known, since the total of what has been extracted from gold over the life of mankind is estimated at less than six billion ounces, or about 170 thousand tons, and about 2500 tons of it are produced annually in the world, and more than half of the production was during the The past 100 years.
This means that the amount of gold in the world increases annually by about 1.5 percent, which makes gold fundamentally different from many other commodities that do not have the cumulative factor, that is, those commodities that are extracted and remain on the face of the earth, unlike many other depleted commodities such as oil Which is extracted and consumed without return. But since the quantities of gold extracted on the surface of the earth are constantly increasing – that is, the quantity supplied is increasing – according to the law of supply and demand, an increase in supply is supposed to lead to a decrease in prices, so the price of gold is supposed to decrease! The defect in this analysis is that demand increases more than supply, and this is true even in years when the demand is relatively modest, due to the weak annual growth rate of gold quantities, which, as we have seen, does not exceed 1.5 percent.
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How can the average person invest in gold? There are several methods, one of which is to buy products made of gold, such as jewelry and jewelry, which can be used as an adornment for women and as an investment at the same time, but there are a number of reservations about this method. First, we have to know that the quality of gold is measured in karats, and the highest degree of quality is pure gold, which was given a scale of 24 carats because the proportion of gold in it exceeds 99 percent and reaches 100 percent.
With this high percentage of gold, 24 karats cannot be used in jewelry nor in many products due to the softness of gold at this concentration, despite the high density of this mineral. For the scientific benefit – even if it is in the field of chemistry that I am ignorant of – the density of gold is 19.3 grams per cubic centimeter, meaning that the weight of a piece of gold in the form of a cube with a side of 1 centimeter is equal to 19.3 grams, and you will not easily find any other material heavier than that, except for platinum. Often its price is higher than gold.
Therefore, attempts to cheat gold are very difficult because any other material added instead of gold will lead to a decrease in the weight of the piece less than the correct weight. But for practical and economic reasons, 18 carats are used instead of 24 carats, which contains 75 percent gold – 75 percent comes by dividing 18 carats by 24 carats – and other materials are added to increase hardness and control color, often copper, silver or rhodium materials. Or zinc and others. Even a measure of 14 carats is considered real gold, but the proportion of gold in it is only 58.3 grams per cubic centimeter.
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Although it is easy to buy gold jewelry, it is not the appropriate way to invest in gold for several reasons, including that the price of the gold piece depends on the design, implementation and other added stones, so there is no direct and precise relationship between the price of an ounce of gold in the international markets and the price of products made of gold. For this reason, there are those who buy gold coins and bars that come in the form of pure 24-carat gold, which is the caliber used in gold trading, whether through the spot or futures markets, and then keep them in safe places in bank cabinets or by specialized companies with insurance work on them. .
However, the easiest way to buy gold is through specialized investment funds or even through buying shares of ETFs, which are shares that are bought and sold like the rest of the shares and do not differ from them in anything, for example GLD share, whose price simulates the price of an ounce of gold, and is equivalent Ten shares of it have the price of one ounce of gold. Despite the popularity of this fund and its ease of trading, there are those who do not consider it a true purchase of gold, and it differs from the actual possession of gold bars or gold coins.
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The reason for this is that these funds may sell more shares than they have of gold, and in this they depend on the idea that they have enough gold to meet redemption requests that are made on a daily basis, and that it is not expected that all investors will claim their money at once, and this is true and expected. But it is not guaranteed. The other option to invest in gold is by buying the shares of companies operating in the field of gold exploration, and there are specialized funds that combine a number of these companies in one basket to reduce the risk of buying the shares of one particular company.
In conclusion, we learned about the characteristics of gold and how to invest in gold, as investing in gold is still an appropriate method for those who possess great wealth and wants to preserve it against the actions of central banks and the impact of inflation, and it is possible that gold prices go through financial bubbles as a result of the fluctuation of the purchasing power of the dollar, and it is possible Speculation on the price of gold is like speculation on stocks, and thus it is not without risk and losing a large part of the capital.
* Quoted from the Saudi Economic newspaper.
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