Gold Investment: Understanding Gold's Value in Today's Market
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Introduction
Today's topic is gold. While there has been frequent talk about stocks hitting record highs this year, behind the scenes, gold prices have also been reaching historic peaks, drawing intense interest from the investment community.
However, when discussing economics or finance, you may have heard the theory that gold prices rise when the stock market performs poorly. Currently, we're witnessing the opposite phenomenon—so what's behind this? In this article, we'll explore the reasons together.
We'll cover basic information about gold, its historical background, and recent market trends to deepen your understanding. So please be sure to read all the way through.
What is Gold?
First, let's clarify what gold actually is. While this article primarily focuses on gold as an asset, it's important to understand the scientific characteristics and historical value that form its background.
From a price perspective, gold is a chemical element with atomic number 79. As its name suggests, it's a metal whose value has been recognized by people since ancient times.
Gold is one of the rarest elements on Earth, constituting just 0.004% of the Earth's crust. This figure demonstrates its extraordinary rarity compared to other metals—it's much scarcer than aluminum (8%), iron (5%), and even copper (0.005%). This scarcity has given gold special value, and it has been used for various purposes from ancient times to the present day, including decorative items, artwork, and currency.
The Value Beyond Rarity
Gold's value extends beyond mere rarity. First, its beauty has fascinated humanity throughout history, often being worshipped as a sacred metal. Gold's beauty possesses a universality that remains unchanged wherever you go. The scientific characteristics of gold also provide important support for this value.
Gold doesn't rust and never loses its luster over time. It's also very soft and malleable among metals, making it relatively simple to adjust its purity or weight. Furthermore, its properties can be subtly altered by alloying it with other metals. Due to these characteristics, gold is used in various forms and applications, such as necklaces and earrings, gold coins and bullion, gold leaf as thin as 0.001mm, and fine, elongated gold wire.
While there are metals in the world that are rarer than gold, such as platinum, gold possesses unique value due not only to its scarcity but also its universal beauty and high practicality. Because of its seemingly unchanging value wherever you go, gold has served as money throughout history.
Gold's Monetary History
From ancient civilizations to the modern era, gold has held an important position as a means of preserving and exchanging value. Particularly noteworthy is the gold standard and its abolition. The gold standard was a system that fixed the value of currency to a certain amount of gold. Specifically, it was a system where governments held gold and issued government currency that could be exchanged for that gold. Based on the stability of gold's value, this system helped guarantee the value of a country's currency to domestic and foreign investors and consumers, contributing to the promotion of international trade that was beginning to become active at the time.
Compared to currencies without precious metal backing or those backed by silver, gold standard currencies showed high stability and helped develop and stabilize the world economy for a certain period. Under the gold standard, countries succeeded in stabilizing their currency values, but the constraints imposed by gold created various disadvantages and limitations that restricted flexible policy implementation.
First, using gold as collateral for currency issuance meant that currency couldn't be freely issued. The reserve ratio indicated how much gold was held relative to the issued currency, and if this number became too low, credibility as an exchange right for gold decreased.
For example, if there was a gold standard currency called "Dollica" that could be exchanged for 1g of gold, and its issuing body had 1 ton (1 million grams) of gold when 1 million Dollicas were issued, the reserve ratio would be 100%, theoretically allowing all Dollica holders to realize their exchange for gold.
However, in reality, not everyone suddenly demands exchange for gold, so there isn't an immediate problem if the reserve ratio falls below 100%. But if this number drops below 50%, or even 20%, Dollica holders begin to doubt whether they can exchange it for gold.
This became a weakness especially during wars or recessions. When massive military funding was needed in a short period, the reserve ratio dropped rapidly, and when economic conditions deteriorated severely, the gold standard became difficult to maintain due to the inability to implement flexible policies. This was one reason why many countries abandoned the gold standard during the two World Wars and the Great Depression.
Meanwhile, most warring nations that abandoned the gold standard experienced extreme inflation, compounded by material shortages, and subsequently aimed to return to the gold standard to stabilize their currencies globally. In the post-war world, the gold standard was adopted for a while, but unlike the pre-war system, only the dollar had a fixed exchange rate with gold, while other currencies fixed their exchange rates with the dollar. This system, also called the gold-dollar standard, was named the Bretton Woods system after the meeting place where it was decided.
While the Bretton Woods system contributed to post-war global stability, the expansion of military spending due to the Vietnam War quagmire, combined with the economic revival of Europe and Japan and the expansion of international trade, continued to increase the dollar supply, clearly undermining the balance with gold reserves. In 1971, U.S. President Nixon suddenly announced the suspension of dollar-gold exchanges, shocking the world. This "Nixon Shock" effectively severed America's relationship with gold, and subsequently, countries transitioned to managed currency systems, issuing the amount of currency appropriate to their economies. They ended their fixed exchange rates with the dollar and later transitioned to floating exchange rates.
After the Nixon Shock, gold no longer played a direct role as currency and lost its special status as a standard currency. However, this didn't mean that gold's value declined. Rather, it moved in the direction of maintaining and enhancing its value in an uncertain market economy.
Freed from the fixed exchange rate with the dollar, gold became subject to market trends like other financial products, but it established itself as a safe-asset status that, unlike risky assets such as stocks, doesn't completely lose its value. Of course, it's important to note that while gold is called a safe asset, it is clearly a risky asset with price fluctuation risk and by no means a risk-free asset with no principal loss.
Understanding the Gold Market
To understand the gold market, it's important to examine the relationship between gold and other risky assets, especially stocks and bonds. Stocks, as explained in other videos, are assets that represent the value of a company itself and have the potential to grow without ceiling. On the other hand, they are generally considered high-risk assets because they can become worthless if the business fails.
Bonds, while lacking the concept of growth, have the characteristic that if promises are kept, money will certainly increase and return. However, if promises are not kept, they too can become worthless.
Gold, on the other hand, doesn't grow, and holding it doesn't yield any dividends or interest, but its value has never completely disappeared even since ancient times. While gold prices fluctuate due to various circumstances, it reigns as the asset with the highest value preservation capability on Earth.
Based on these differences in characteristics, from a traditional perspective, risky assets such as stocks tend to increase in value during economic booms—when growth expectations are high—and decrease in value when the economy is unstable.
Meanwhile, gold has the characteristic of increasing in value during economic recessions—when growth expectations are weak, interest rates tend to fall, and currency credibility decreases—and losing popularity during booms. Indeed, it has shown such price movements in the past. This is because gold functions as a safe haven during crises, and many investors have repeatedly sold stocks, bonds, or various currencies and switched to gold in uncertain times.
Originally, investing in gold, which doesn't grow or accrue interest, cannot be considered a good strategy for investors, but for large-scale investors who are in a position to protect assets, holding gold can be an effective means of responding to crises.
Recent Trends in Gold Prices
Looking at recent gold prices, there are interesting movements that are difficult to understand by conventional wisdom. Contrary to the textbook explanation that gold prices slump when stocks are booming, recently gold prices have been rising despite rising stock prices.
In fact, looking at movements over the past decade or so, gold seems to show performance correlated with the U.S. stock index S&P 500, which is representative of growth assets. While there are aspects that contradict stock prices, the theory that gold prices fall when interest rates are high because gold doesn't accrue interest has also recently collapsed. It could be said that understanding gold itself is becoming increasingly difficult.
So why has the gold price recently been soaring, contrary to past trends? Various factors are thought to be working in combination, and while it's not easy to verify, one factor that can be cited as a major reason is that countries like Russia and China are pursuing asset diversification.
What does this mean? Currently, the most important currency in the world is still the dollar, and normally countries hold a certain amount of dollar assets to preserve their own currency. By holding dollars, which can be considered a global currency in addition to their own, governments and central banks can enhance their creditworthiness.
In the past, major nations including Russia and China also held dollar assets, but Russia in particular has been economically sanctioned by the world and excluded from the dollar network, while China has experienced economic divisions with the United States that could be called a trade war. These countries are implementing holdings of assets other than dollars to increase their financial security and are actively proceeding with their replacement—and what was chosen instead of dollars was gold. This is clearly evident in the announced data of various countries, indicating that demand for gold is increasing due to national circumstances.
From an even longer-term perspective, there is a view that the global increase in money supply is one factor pulling up gold prices. Gold continues to be mined today, but its increase is less than 2%, and the amount that can be mined in the future is not expected to be very large. In contrast, currencies such as the dollar and yen continue to be issued and circulated, so even if the value of gold remains unchanged, the exchange ratio will increase as currency increases. That is, gold prices rise.
More precisely, the value of increased currency is decreasing. Particularly since 2010, advanced countries have increased their currency issuance through quantitative easing, and their circulation has increased incomparably to the past. Of course, since currency quantity alone doesn't determine the price of things, it's not a simple story that an increase in currency quantity immediately affects the exchange ratio, but when viewed over the ultra-long term, it's logically reasonable that as the basic value and quantity of gold don't change significantly while the amount of currency increases several times, gold prices will increase accordingly.
Gold Investment Methods
As you understand more about gold, you might become interested in investing in it. Let me clarify upfront that what I've introduced so far is quite basic theoretical information, and actual market prices depend on many more variables, making it difficult to predict future conditions.
There are various opinions about the effectiveness of gold investment as well. Therefore, I'm not recommending gold investment by any means, but for those who might want to consider holding gold according to their own judgment, I'll introduce a few methods of gold investment from here.
When thinking of gold, you might first imagine physical gold, and it's indeed possible to choose such a purchase method. However, holding physical gold has some difficulties. Direct possession of physical gold always carries risks of loss and theft, and entrusting it to retailers may incur storage costs.
Above all, physical assets tend to have larger fees at purchase and sale due to the need for appraisal and other factors. Personally, I feel that transactions with jewelry stores also carry a high psychological burden.
On the other hand, gold investment is possible beyond physical possession. The most common method is purchasing investment trusts. Investment trusts, which gather funds from many people and combine them for investment, can be purchased through securities companies, and among them, there are funds that target gold for investment.
Especially ETFs (Exchange-Traded Funds) can be traded on exchanges like stocks, and depending on the product, they are very popular as excellent gold investment products that can suppress management costs to around 0.5% annually.
Depending on the product, for example, globally popular funds like SPDR Gold Shares actually hold gold as collateral in the fund, allowing you to indirectly create a state of holding gold.
Of course, since their prices are linked to gold prices, if gold prices rise from the time of purchase, you make a profit, and if prices fall, you incur a loss to that extent, so caution is needed just as with physical gold asset purchases. However, it can be said to be the most convenient and cost-effective way to start gold investment.
If you have a brokerage account, purchasing these is possible, and with an online brokerage, you can complete all procedures on your smartphone. Those who have already opened accounts related to investment accounts might find it educational to check the available offerings.
For those who don't yet have a brokerage account, this might be a good opportunity to open one. For a brokerage account, I recommend major online brokerages like Fidelity, Charles Schwab, or Vanguard. They handle major gold-related investment trusts, account opening itself is free, and can be completed easily on your smartphone.
Summary
To summarize this content, gold has been closely related to human culture and economy since ancient times and has been treated as a representative of valuable things. It played an important role as a direct and indirect currency, and even in the modern era where that role has been released, it has become an entity that receives the highest level of trust as a means of value preservation. It has become familiar to the general public through physical transactions and investment trust trading.
Thank you for reading all the way through. See you next time.