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Gold as a Store of Value

29 September 2020 By Mircea Vasiu

Gold has fascinated generations of investors and continues to do so. The yellow metal is part of any long-term portfolio, and for good reasons. 

Nowadays, any brokerage house offers the possibility to trade gold. Trading gold, or the XAUUSD pair, consists of speculating on the gold movements against the fiat currency – the U.S. dollar.

However speculating on its price does not reflect the true value that gold brings in the long term. Gold as a store of value is reflected only when holding it for long periods of time.

In other words, trading or speculating represents a short-medium term activity that may or may not reflect the true benefits gold brings to a portfolio. However, looking at the bigger picture, and the logic behind owning gold becomes obvious.

Gold as a Long-Term Investment

A quick look at the last century and we find that gold value has been impressively stable during all this time. For example, a car in the 1900s could be bought for about $1,000, which represented approximately fifty ounces of gold. In 2020, approximately forty ounces of gold will buy more than a decent car. Or a house in 1900s America had a cost of about five thousand dollars or 250 ounces of gold. In 2020, a regular house costs $350k, or about 200 ounces of gold.

Sure, such examples may look a bit extreme. One would argue that it depends a lot on the type of car. Or another would say that it depends on the neighborhood or the state where the house is located.

However the idea is to look at gold as a store of value and see if it has such qualities. For all intents and purposes, it does.

The world changed dramatically in the last century. Yet, gold remains one of the few things that kept its value, no matter what. Fiat currencies, in the meantime, they all lost value against gold. All of them!

Hence, when thinking of gold and its diversification benefits, we must think of the long and very-long term qualities it has. Sure, speculating on the XAUUSD market’s fluctuations is a strategy designed to bring quick profits. But when thinking in the long-term, gold must be part of any portfolio.

Some periods will be marked by long-term consolidation in the price of gold. Some other ones in declines or abrupt advances. But when it moves, the price of gold correlates with other currencies so that it represents the true store of value.

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