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The role of gold in the economy and your portfolio

by , 26 May 2014

Gold is a currency. Before paper currencies existed, people used it to pay for produce and services. Through early-2000, gold lost its shine as some investors and governments lost interest in the yellow metal. This saw the price of gold fall below $300 an ounce in 2001 after trading over $800 an ounce in 1980. But the shine has returned to gold. Read on to find out more about gold and why you should have some gold in your portfolio…

What is gold?

You don’t have to look far to see that gold is an important commodity. You can sell your gold to a number of ‘we buy your gold’ shops and there are numerous ways to invest in the yellow metal.

Apart from being a commodity, gold is a currency. Throughout history people have used gold as a form of money. But why gold?

It’s well suited to the task in hand…
  • It’s very durable, John Stepek in Money Week explains. It doesn’t rust or rot away.
  • It’s fungible. This means one bit of gold is the same as another bit of gold of the same quantity.
  • It’s portable – in smaller amounts.
  • It’s not easily available – people have to dig it out of the ground.
Gold played a role in world currencies until 1971. The US president at the time, Richard Nixon, cut the link between the dollar and gold.

Because of its role as a currency, gold’s value has never fallen to zero.

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The role of gold in your investment portfolio

It makes sense to hold some gold in your portfolio as a form of insurance.

Since the financial crisis in 2008, central banks have put their printing presses to work. They’ve increased the amount of paper money to prop up their economies. Over the same period of time, the amount of gold has only risen a tiny amount – by the amount mined.

With paper currencies devalued it makes sense to have some of your wealth in gold as insurance. Of course, you only want to have a small proportion of your portfolio in gold – maybe 5%.

So there you have it, the role of gold in the economy and your portfolio.

The role of gold in the economy and your portfolio
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