Investing in anything is usually preceded by the thought: what is there to win and what is there to lose? There has been a lot of discussion about the upsides of the gold rally but little if nothing has been said about the potential losses. Clearly, many people are wary of investing in gold because they fear that the gold price could suddenly crash.
Gold has so far attracted only $5.4 billion worth of private investment.. At the same time, investors poured $22 billion into emerging market mutual funds and $155 billion into bonds. While some commentators have labeled gold a bubble, these numbers show the exact opposite. Being a tiny fraction of the bond market’s value, gold remains a niche investment. The fear of the unknown keeps savers from investing in gold, and the media hype is not helping
Most people perceive gold to be a speculative investment whereas cash (CDs), bonds, real estate and managed investment plans are considered to be safe, conservative investments – but how likely is a sudden crash to occur in the gold price? If history is any guide, it’s not likely at all. In fact, gold has less surprises for you than any of the assets mentioned above.
1833-1969: Virtually no setbacks in the price of gold
The dollar-gold exchange rate was set to $18.93 per ounce in 1833 and there was virtually not a single notable year-on-year drop, with the exception of 1931 until 1970 when it fell 17%. It is interesting to note, considering that in 1931 and 1932 the general price level also dropped about 10% in each of these two years, that gold didn’t lose any real purchasing power during the deflationary Great Depression but actually gained some. We have many more Investing Help Articles Now Available.
1970-2010: Losses in gold minimal compared to gains
In 1971, with the U.S. abandoning the gold standard and, as such, no longer guaranteeing the fixed exchange rate of $35 per ounce, gold began trading freely around the world and the gold price became more volatile. Has gold since become a risky investment?
Even in the post-gold-standard years, gold has never surprised with a sudden crash – with one exception. In January 1980, the Soviets invaded Afghanistan and this geopolitical earthquake made the gold price skyrocket from $559 to $843, only to fall back to $668, all within the one month of January 1980. It is probably safe to say, however, that this was a very short window of opportunity and virtually no private investors managed to sell their gold at the peak that lasted only 2 days.
It seems that gold is one of the most stable investments out there – it just doesn’t burst. Even after the supposed “gold bubble” of 1980, there was no bursting. Rather, it was a gradual deflation with enough time to get out. Even our imaginary investor didn’t suffer any notable damage and had plenty of time to exit before taking a loss.
Those of you who have already been praising gold’s current prospects to your friends why not mention the downside the next time. It is one of the best arguments for gold. If you are a conservative investor: You must take a closer look at gold. We have many more Bullion Investing Help Articles Now Available.