Gold: Is Gold the Currency of the Future?
Gold: Is Gold the Currency of the Future?
What does the future hold for gold? Those who sell it are betting that gold prices will drop. On the other hand, buyers hold out hope that gold will increase in value.
What can you do with gold?
Holding gold may be a hedge against future swings in world currencies. Gold has never been worth 'zero'. Should the dollar collapse or the euro plummet, some investors will turn to gold for something tangible to add to their portfolios.
In general economics, price is a measure of demand for a particular product or service. Certainly the price of gold reflects what investors, manufacturers, and governments are willing to pay for it. The value of a dollar (or euro, baht, or peso) is determined by its exchange rate against other currencies. The value of gold is also defined by its worth relative to other currencies. Wal Mart may have the best prices for Sudafed, but they won't trade it for gold.
How is Gold Measured?
Gold is usually measured by the troy ounce. Troy ounces are a component of the Imperial System, which is a set of units defined for use throughout the British Empire in the early 1800s. For the most part, the Imperial System has been supplanted by the Metric System, but gold, silver, gunpowder, and gemstones are still measured in troy ounces. One troy ounce is equivalent to 31.1034768 grams. This is an arbitrary designation, but it is universally accepted, assuming that the Earth is your universe.
How is Gold valued?
The spot price of gold defines exchange rates for "on the spot" or immediate transactions. There is no single spot price: rates are published for many major currencies. It is possible to exchange gold for spendable currency in countries around the world. Spot prices may change constantly, but many investments lock in to the spot price at the end of the trading day.
Gold futures are also big business. Instead of actually purchasing physical gold, investors purchase the privilege of buying agreed-upon volumes of gold at some point in the future. This strategy allows a relatively small investment to control a large amount of the precious metal because the option costs much less than the underlying commodity. For example, assume gold is selling for $1000. Investor A, who thinks gold will drop in value will sell a call that gives investor B right to buy Investor A's gold at some value (referred to as the strike price) at or above $1000. Immediately, investor A pockets the price of the call.
The transaction is not complete, however. Investor B anxiously watches gold markets, hoping that the spot price rises above the strike price before the option expires. When the option does expire, investor B may elect to purchase the physical gold at the strike price or allow the option to expire worthless. Either way, investor A keeps the original funds from the option sale.
To further complicate the matter, investor B may resell the (unexpired) option to investor C. The option literally becomes a currency that can be 'spent' within the confines of the option exchange system.
What could go wrong?
Given that gold tends to increase in value during rocky economic periods, is gold a good holding for the average investor? Having some gold in a portfolio is probably a good idea. Dedicating an entire portfolio to gold and gold vehicles may create risk profiles that are not comfortable for most amateur investors. Gold futures, gold holdings, gold mutual funds, and gold jewelry are all forms of gold investment; be sure to closely examine the diversity of your portfolio.
Consider an admittedly pragmatic scenario in which an entire portfolio is dedicated to gold holdings in anticipation of future currency failures. Picture a US-based investor who fears a total meltdown of the US dollar and therefore invests his entire next egg in physical gold. The gold may be hidden in his mattress or sequestered in a secure vault in Geneva. If the dollar devalues, the investor trusts that his gold will maintain its value or even increase in worth relative to the prevailing currency in his hometown. Eventually he'll need to pay the gas bill; unless the utility company begins accepting payment in troy ounces, the gold will have to be converted back to dollars in order to have any purchasing power.
This article is not an offer to buy or sell any investment vehicle. The author has not been compensated by any investment company, research company, or other financial institution. Always perform due diligence before investing any money.