When you buy gold bullion it can be considered a hard currency. For most investors gold is a commodity but there have been instances within economics that point out the behaviors of currency and not commodity.
How can this be? The reasons are simple and complex at the same time. Sugar is a commodity but if the financial market or economy of a country collapses the price behaves like a commodity. On the other hand if there is financial problems within a national economy the price of gold behaves like a currency.
The reason is that gold can act like a currency is because gold is often held in reserve as collateral for currency. A five pound note has no value if the Government of the United Kingdom has no gold to back up the worth of the note.
Currency, however is not necessarily money. Currency refers to a physical object that can be used to acquire something. For most people that may be money, bank deposits, or an object that can be bartered with.
Gold Bullion As An Investment:
Why buy gold bullion as an investment? The answer is fairly simple. Gold is recognized the world over and as such holds value that currency does not. Consider the problems that plague currency.
Inflation is a problem that affects the value of currency. National Debt is a problem that affects the value of currency. Investment market collapse or devaluation is a problem that affect currency.
War is a problem that affects currency. Social unrest such as high unemployment is a problem that affects currency. All of these issues can affect the value of currency. Gold which is both a commodity and a form of currency has an insulating factor from all of the issues that affect currency. That factor is that gold is recognized around the world but is not tied to the value of currency.
Imagine this: The housing market in America in it’s prime was producing huge amounts of equity almost on a daily basis. A house that cost $200,000 American dollars in 2004 would shoot up in value to $280,000 in six months. That house represented a gain of $80,000 in just six months.
Houses were great investment and people were buying them as fast as they could. Everyday people were suddenly faced with these huge amounts of equity that they could borrow from and spend like cash, and most of these people spent money like it was going to be there forever.
The problem was that the money they spent disappeared when the housing market crashed. These people were left holding huge amounts of debt that in most cases would never be recoverable. That house that cost $200,000 US dollars was now worth $120,000, but the people owed $280,000.
Imagine this: Say those people who had $80,000 of equity to spend invested in gold instead of buying luxury vacations and fancy cars. In 2004 the London Fix (January) gold price had a high value of about $425 US dollars per ounce of gold.
Which means that for $80,000 US Dollars an investor could have bought about 188 ounces of gold. In 2011 The London Fix (January) shows a high gold price of $1390 US dollars per ounce.
The difference between 2004 and 2011 gold price is $965 US Dollars per ounce. This is profit. So the $80,000 invested in gold in 2004 would have netted the home owner $181,420 dollars in profit.
Even if the price of gold had not gone up, the investor would still have gold that is worth $80,000. The house would still be worth $120,000. This is an example of why gold is good as an investment.
The price of gold is tied to the world market and not to a single market. The value of currency is mostly tied to the economy of a single nation. This makes gold a more stable investment. As with all investment there is risk. Understand the risk of investing by doing the proper research.