The past few months have seen the price of gold go through some pretty extreme gyrations, with the value of the precious metal reaching new all-time highs earlier this year. All of this might have you wondering: why would anyone want to own a non-productive piece of metal? Warren Buffett (Trades, Portfolio) has famously derided gold as an investment - although Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) recent acquisition of a stake in gold miner Barrick Gold (GOLD, Financial) would seem to be at odds with this position. Here's why investors like to own gold.
Why own gold?
Gold has been a store of value for thousands of years and many people still view it as such, even though modern currencies are no longer tied to its price. Proponents of gold ownership argue that since central banks can always create more paper money out of thin air, there is always a danger that the value of fiat currency will be eroded through inflation. Gold, on the other hand, cannot be created out of thin air, so it is more likely to hold its value in an inflationary environment.
The commodity is also considered to be a hedge against financial instability, particularly in countries where the value of the currency cannot be taken for granted. For example, the value of the Russian rouble relative to the U.S. dollar collapsed from around 40:1 to around 70:1 over the course of a few weeks in late 2014 when the U.S. imposed harsh new sanctions on the country. Investors in emerging markets often choose to own gold to hedge themselves against such adverse events.
How do investors own it?
There are a number of ways to invest in gold. The simplest and most straightforward option is to own the physical metal, either in the form of bars or coins. This certainly guarantees that you will always have access to the stuff, but it is a relatively illiquid way of storing wealth - to convert it into a usable currency, you would have to go to a physical gold dealer. So instead, some investors own gold certificates, which represent ownership of gold that is stored elsewhere and that can be traded on electronic exchanges.
Other ways to gain exposure to gold include owning shares of gold miners - like the aforementioned Barrick Gold - companies whose profits are directly correlated with the price of gold, but which offer more variety than simply owning bullion. Gold mines often produce more than just gold - Barrick extracts silver and copper too, for instance.
Whatever method they choose to use, investors should remember that the price of gold is ultimately determined by the demand for it by other parties, which makes forecasting its future price difficult. With what being said, it can offer a good way to add a degree of diversification to your portfolio.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Warren Buffett Is Not a Fan of Long-Duration Bonds​
- David Einhorn Issues a 3rd-Quarter Update
- Joel Greenblatt: Think About Buying a Business Like Buying a House
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