Why Do So Many Investors Turn To Gold Bullion During Times Of Economic Uncertainty?
by Nabamita Sinha Finance 24 August 2023
The next recession is coming. Tomorrow? Next year? Ten years from now? That’s hard to say, but many economists consider recessions to be a natural and unavoidable facet of modern capitalist society. You may be reading this as markets are sinking, and public officials are sounding the alarm that a recession is already here. Often, gold prices rise during recessions and other periods of economic uncertainty. Wondering why that is? Read on!
What Is Meant By Gold Bullion?
Gold bullion, an alternative to gold coins or bars, comes with 99.5-99.9% purity. It is usually reserved as an asset by central banks and the government. In order to create gold bullion, it is necessary to discover gold first by mining industries. Next, it must be removed from the surface of the Earth in gold ore forms.
Investors can either purchase gold bullion or sell them with the help of active dealers. They are found in multiple global bullion markets. Gold or silver bullion is easily accessible through futures contracts or exchange-traded funds.
A lot of investors rethink before considering gold bullion an investment. This is exactly what I am talking about in the next section of the article.
Examining Gold Bullion As An Investment
First, let’s look at gold bullion as a specific investment type. Gold bullion is essentially a commodity. Commodities, in turn, are generally interchangeable goods. A barrel of Brent crude oil is another example of a commodity. One barrel of Brent crude is generally changeable for another barrel of Brent crude of the same quality and quantity.
Gold Coins and Bullion Are Different…
Gold bullion differs from collector’s gold coins, which typically are not commodities. These coins have value beyond the gold itself. An ancient Roman gold coin contains valuable gold, but it’s also a piece of history, so its value may greatly exceed the gold it contains.
Collector’s coins often aren’t as liquid because the coin’s value must be carefully examined, and then a buyer must be found. A collector’s coin also isn’t necessarily interchangeable with another collector’s coin. This makes collector’s coins different from bullion.
A Valuable Asset…
With gold bullion, a gold bar of the same weight, purity, and quality is much more readily changeable than another gold bar of the same weight, purity, and quality. Gold bars from trusted authorities may be more valuable than those from lesser-known authorities. The key difference, however, is the trust of the party selling the gold, not the gold itself.
Many investors buy and sell gold bullion based on changing economic conditions. If the economy looks hot, investors might sell gold bullion to buy stock shares, anticipating that financial markets will increase. If a market turns bearish, some folks will buy gold bullion as they see it as a safer investment.
What Goes Into Gold Bullion Buying And Investing?
There are a lot of ways to own or invest in gold bullion. At times of economic unpredictability, investors restored all their faith in bullion. But it is important to remember that their prices can fluctuate, too. This simply indicates the vulnerability to loss. Even after knowing this, why did so many investors invest in it?
Its Physical Form
One of the biggest benefits that comes with bullion is that investors can buy it in document form or physical form. Gold coins or bars are subject to purchase from reputable dealers and must be stored in a safe place. You might also buy bullion in a bank’s allocated account.
The client of the bank account has all legal ownership regarding gold. In case the bank deals with bankruptcy, the creditors cannot claim the bullion stores in the allocated account. The reason is it belonged to the owner or client and not to the respective financial institution.
ETFs or Exchange-Traded Funds
ETFs are different from possessing gold because investing in them lets investors access the gold bullion market. These refer to funds that might consist of a collection of securities. On the other hand, the fund keeps tracking an underlying index. The underlying asset can be gold certificates with Gold ETFs.
It is easy to exchange gold certificates for cash or physical gold that is equivalent at bullion banks. Moreover, ETF funds can be easily purchased or sold, just like equities, with the help of an IRA brokerage or standard brokerage account. Because of their typically low fees, a lot of investors considered it a better option.
Future Contract Forms
Finally, investors might also be able to purchase bullion’s future contract, which is nothing but a documented agreement. Under it, one mentions whether they wish to buy a commodity or sell it at a fixed price along with the contract and a stipulated time period.
As long as the delivery does not take place, the buyer cannot own gold. But, if he does want to purchase gold coins or bars, they might sell the contract before the date of expiration.
Gold has specific properties that contribute to its use as a haven asset and store of value. For one, humans have sought and admired gold throughout history. From ancient Egyptians to folks buying wedding rings today, gold has long been in demand, and history suggests it will remain in demand.
Gold’s supply is also limited. All the gold already mined in today’s world would fill up less than 4 Olympic swimming pools. Meanwhile, central banks have been known to print money at will. As the money supply expands, the value of individual dollars (or other monetary units, like francs) often declines. While more gold may be mined in the future, its supply has generally increased slowly and predictably.
Further, gold is also chemically stable, meaning it doesn’t tarnish or rust. If you buy silver right now, the silver itself could change, which could affect its value. That’s typically not true with gold. Add it all up, and gold has historically proven to be a useful “safe haven” asset during times of uncertainty.
Read More :