Why investing in gold could be a profitable choice for the future

20 April 2023 г. 5 minutes of reading

Especially now, from an investor's point of view, there are several good reasons to own gold in an investment portfolio. Chances are very high that the yellow precious metal will be a means of reducing risk and increasing profitability. Unfortunately, many investors are often unaware of how the price of gold has evolved over the past decades.

Why investing in gold could be a profitable choice for the future, pic №1

Anyone who bought gold in euros in January 1999 and held it until today has seen its value (calculated in euros) increase by an average of 8.6% per year. For comparison: during this time, the DAX index rose by 4.7%, the S & P 500 - by 5.1%, and the US stock market index, taking into account the reinvestment of dividends, - by 7.2%. And those who bought gold in US dollars in 1971 were rewarded with a return of 8% per year.

No other currency has performed as well, even with normal bank account interest - and gold is a currency, it is a type of money.

In the past, of course, there were also phases when the rise in gold prices was not so pronounced. For example, from the beginning of 2013 to March 2023: here it averaged 2.8% per year. But in the long term, gold has risen in price significantly. It not only compensated its owner for consumer price inflation, but also rose in price in real terms.

There is an explanation for this conclusion: over the years, the price of gold has always risen to higher levels, it has followed an upward trend. This was not without setbacks, not without periods, so to speak, drawdowns for the owner of gold, but since the beginning of 1971, when the price of gold was “untied” from the US dollar, it has gradually increased over time.

Why? Gold is still viewed by many people in the world as a "safe haven" as a replacement for official fiat currencies such as the US dollar, euro and others. At the same time, physical gold is relatively scarce.

From the beginning of the 20th century until today, the average annual increase in gold production has been only about 2%. Sometimes the annual production fluctuates wildly, jumping up and down, but on average, the amount of gold does not grow by more than 2% per year. Central banks are increasing the unsecured money supply much more. In the US, since 1960, its growth has averaged 7.1% per year - 3.5 times more than the growth in gold production. In the Eurozone, it has averaged 6.4% per annum since 1981 - again 3.2 times the annual average increase in gold production.

Thus, gold became relatively scarce compared to the fiat money supply, and this tended to support the yellow precious metal's market price, calculated in US dollars as well as in other currencies. Okay, that was in the past. And what about the future?

Given the problems in the international monetary system, it is to be feared that the expansion of the money supply by Central Banks will become more and more rampant, the relative shortage of gold will continue to grow - and therefore the price of gold will also rise.