eli5: Why is investing in Gold considered so secure?
In: 4
Back when money was first becoming a thing, currency was backed up by physical commodities like gold. Every unit of currency was guaranteed by an amount of a physical thing. The finite amount, rarity, or usefulness of the things made them valuable and this in turn gave the currency its worth. If you wanted more money, you needed more stuff of value to stick in a vault in exchange for it.
Nowadays we have fiat currency. Fiat currency can be created as required without the need for stuff to back it up. Not being pegged to anything tangible, it’s only worth precisely as much as we treat it as being worth – which is pretty much decided by the perceived strength of your economy. If your country/bank needs more money, they can print more, but this just makes every single bit of money worth a little bit less when it’s divided over the actual worth of the economy. This is inflation.
Meanwhile the same finite amount of gold is still sat in a vault. And unless humanity collectively decides overnighy that it’s overrated and is actually rather useless, it’ll still be just as valuable to us tomorrow. And if your currency is undergoing inflation and slowly losing its buying power over time, then you’ll need more and more of it to buy that same amount of gold as time goes on.
This is why gold is meant to be a safe bet. But of course it’s not perfectly safe because gold itself is only worth as much as we agree it is worth.
Latest Answers