Here’s Why You Should Buy & Invest in Gold

Introduction

Throughout human history, gold has been an asset that stands out above the rest. From the glittering treasures of ancient Egypt to the vaults of modern central banks, gold has always been a symbol of wealth and security. The yellow metal has numerous unique qualities that make it the ultimate money and store of value that helps people protect their hard-earned wealth from the ravages of inflation as well as monetary, financial, political, and geopolitical crises. In good times and bad, gold is trusted by ordinary investors and central banks alike. Though our world is becoming increasingly complex and technologically advanced, gold is finding even more favor each year as investors come to appreciate its simplicity and robustness. In this piece, we will explain the many benefits of investing in physical gold in the form of bullion coins and bars.

Why Gold is Money

Though gold is not typically used in ordinary day-to-day transactions in this era, it is money according to the most widely accepted definition of money.

Gold fulfills all these functions and characteristics, making it an unparalleled store of value and safe-haven asset. Unlike stocks or bonds, gold has no counterparty or default risk, as it is not issued by any entity such as a corporation, bank, government, or central bank. Of perhaps even greater importance is how effectively gold retains its purchasing power over time, which is why it has been so universally trusted and accepted as money for thousands of years by so many societies and cultures that otherwise have very little in common with each other. For all of those reasons, gold has earned its justifiable reputation as the ultimate money.

Gold’s Long History as Money

Gold's universal appeal spans countless cultures and historical eras, leading to its use as money for 97% of the last 2,500 years. This enduring choice by the free market is a powerful testament to gold's reliability and value as a form of money.

Gold coins began to be used as money in various societies, starting with the Lydian civilization in the 6th century BCE, and continued through ancient Greece, the Roman Empire, and the Spanish and British Empires. These societies found that using gold as money facilitated trade, provided a significant economic boost, and ultimately underpinned their longevity. Two millennia later, in the 19th and 20th centuries, gold backed the international monetary system, creating an environment of stability and virtually no inflation.

Only in relatively recent times—the past 80 years or so—has gold not seen widespread use as money. Although eight decades may seem significant, it accounts for just 3% of the past 2,500 years, making gold's underutilization as money a historical anomaly. With the alarming increase in inflation and financial instability, there are growing calls and expectations for gold to once again underpin the international monetary system.

Gold’s Superiority as a Store of Value

Gold is uniquely capable of retaining its purchasing power over long periods, even as the cost of living rises, making it a superior store of value and an effective hedge against inflation. Remarkably, an ounce of gold today buys roughly the same amount of goods as it did throughout history—a fascinating phenomenon known as "The Golden Constant." For example, a quality men's suit has long been worth the equivalent of one ounce of gold. In the 1930s, both a men's suit and an ounce of gold cost approximately $35. Nearly a century later, both still cost around $2,300. This illustrates how, despite the increase in the nominal U.S. dollar cost of a suit, the value of gold has kept pace.

In contrast, fiat or paper currencies such as the U.S. dollar, British pound, euro, and Japanese yen continuously lose purchasing power over time, eventually becoming worthless. This is due to central banks and governments recklessly expanding the money supply, unlike gold, which cannot be created or printed at will. As a result, gold is a far superior store of value and form of money compared to paper currencies. Gold's sensitivity to inflation and changing inflation expectations is why central banks, investors, and other market participants monitor it so closely.

Gold as a Safe Haven Asset

Over the millennia, gold has earned a reputation as the world's premier safe-haven asset for protecting wealth during crises and periods of strong inflation. Gold's price typically rises in response to crises, benefiting those who already hold it. As a crisis worsens, more individuals and institutions shift their wealth into gold, driving its price even higher.

Gold's lack of counterparty and default risk, unlike stocks and bonds, makes it humanity's preferred safe-haven asset during turbulent times. Essentially, gold serves as financial insurance against monetary crises, geopolitical risks, and systemic financial system failures. During extreme crises such as hyperinflation, wars, and political upheavals, small gold bullion coins and bars are in high demand due to their portability and high value-to-weight ratio, making them more practical than larger gold pieces. The gold bullion market is highly liquid, thanks to the metal's long history, strong reputation, and recognizability, which proves highly advantageous in times of crisis.

Why Central Banks Are Some of the Largest Holders of Gold

Central banks, including the U.S. Federal Reserve, the Bank of England, and the Bank of Japan, hold substantial amounts of gold due to its safe-haven qualities, protection against inflation, and liquidity. These attributes help mitigate the risks associated with the fiat currencies and bonds in their reserves. Central banks view gold as a crucial emergency asset, reliable during monetary crises. Despite their significant trust in gold, central banks often downplay its importance in public statements to maintain confidence in the paper currencies they issue. The discrepancy between their words and actions—stockpiling large quantities of gold—suggests it is wise to trust what they do rather than what they say.

The Bank of England, one of the most influential entities in the global gold market, succinctly explained why central banks hold physical gold:

• It is the ultimate store of value
• To diversify their holdings of currencies and other reserve assets
• In case gold resumes a central role in the international monetary system

The Bank of England further stated:

“For thousands of years, gold has been, in times of war and crisis, the ultimate store of value and medium of exchange. Gold is virtually indestructible, anonymous, mobile and almost universally acceptable. In times of crisis and uncertainty, the presence of a sizeable gold holding boosts confidence of creditors, not least because gold is the highest quality asset: unlike foreign currencies, it is not a claim on a debtor (bank or government) and therefore does not have the same risk of default”.

Gold serves as more than just a crisis hedge for central banks; they also utilize their gold holdings during stable times by lending, leasing, and swapping them to commercial bullion banks, thereby earning interest. This practice dispels the popular misconception that gold doesn't generate interest, highlighting its versatility as an asset.

According to the World Gold Council, the United States, Germany, France, and Italy hold the largest gold reserves among nations. Much of the developed world’s gold reserves were established in the 1970s to provide central banks with the option to back the international financial system with gold once again. While developed nations maintain the bulk of central bank gold reserves, developing countries, including China, India, and Russia, are rapidly accumulating gold to catch up. There is substantial evidence suggesting that China and Russia are building their gold reserves in preparation for a potential future monetary reset and a shift away from the U.S. dollar-dominated global monetary system.

Gold in Times of Financial Repression

Fiat money apologists often deride physical gold for its lack of yield as well as the costs associated with storing it in vaults. Not only is the lack of yield argument invalid because gold lending can generate a return (as we’ve mentioned earlier), but also because of central banks’ increasing application of financial repression in the form of zero interest rate policy (ZIRP) and even negative interest rate policy (NIRP). In those conditions, savers earn negative returns on their bank deposits and bonds after accounting for inflation. In times of financial repression, holding money in the bank may be even more costly than storing gold, and without the benefit of gold’s lack of default or counterparty risk. Talk about a raw deal!

Most people are unaware of the serious risks of storing wealth in bank accounts including counterparty risk, default risk, and bail-in risk. Those risks are rooted in the fact that bank deposits are just liabilities that a bank creates on its balance sheet, which is in direct contrast to physical gold that is held outside of the conventional banking system.

China’s central bank and private sector now hold at least 20,000 tons of gold, which is a significant increase from the country’s roughly 4,000 ton holding in the year 2000. China ramped up its gold holdings through a strategic combination of imports, increasing gold mining production, and accumulation by the People's Bank of China (PBoC). Those efforts helped China to surpass Australia as the world’s largest gold mining producer in 2007, and by 2015, China was importing over 1,500 tons of gold each year, primarily from Western countries. In 2001, China’s central bank held less than 400 tons of gold, but now holds at least five times that amount and is believed to understate its official gold holdings.

Why Should You Invest in Physical Gold

While there are countless investment products designed to track the price of gold, only physical gold offers the benefit of zero counterparty or default risk—one of the primary appeals of the precious metal. Most gold-tracking investment products are merely "paper gold," where you are a shareholder rather than an actual owner of physical gold.

Furthermore, modern gold-tracking investment products have numerous pitfalls and have not stood the test of time the way that physical gold has for thousands of years. For example, there is a significant risk that those complex paper gold products will fail in the coming global financial reset that we expect in the not-too-distant future. For all of those reasons, savers and investors are better off holding traditional bullion coins and bars that are owned free and clear without any complex financial entanglements.

BullionStar offers a wide variety of popular gold bullion coins and bars from the world's most prestigious refineries and mints including the United States Mint, the Royal Mint, the Royal Canadian Mint, PAMP, Valcambi, and more. BullionStar is unique in enabling customers to purchase bullion products and have them shipped directly to their address or store them in our ultra-secure vaults in the United States, Singapore, and New Zealand for maximum geographic and jurisdictional diversification.

Conclusion

As we have demonstrated, gold is a superior form of money, a reliable store of value, and a trusted safe-haven asset. In an era where governments and central banks continue to print paper currencies excessively, interest in physical gold and silver is resurging as a hedge against currency debasement and inflation. Physical precious metals offer a refuge from the increasing complexity of our global economy and financial system. Gold bullion investors are well-positioned to benefit from the growing demand and enduring popularity of this timeless asset, revered by humanity for thousands of years.

If you enjoyed this article, please check out our guide to investing in silver as well!