Gold Investing: When It Began and How It Works

Nothing indicates wealth and success like gold. Even the way we refer to gold in everyday language indicates how we view it. "The golden touch," "good as gold," "the gold standard" - people have always held gold in high esteem, and the people who owned and held gold were always among the wealthiest and most powerful in society.

Today, gold is still viewed as a remarkable asset with global importance. Gold is the rare investment that can be worn as jewellery. It can be fashioned into both luxury goods and portable assets. Gold’s high density makes it compact and easily stored in bars or in coins. People have owned gold, worn gold, traded in gold, pawned gold, and even worshipped gold for thousands of years.

What makes gold so popular? Besides gold’s beauty and lustre, it has several physical properties that make it appealing. Its relative durability lets gold be used in hard-wearing ornaments, yet it is pliable enough to be easily worked. It can be stretched thinner than paper to make gold leaf, or used in high-end technological components. 

Gold comes in different purities, ranging from 9ct to 24ct. Jewellers, valuers and pawnbrokers all assess jewellery based on the carat gold it is fashioned from. The higher the carat, the higher proportion of pure metal the piece contains, and therefore the higher the price the piece will command.  

Having a clearly-defined system of measuring purity makes it easy value gold without seeing it. It also allows traders to publish a gold price index, making the price for different gold items  easy to calculate based purely on weight and carat.

Gold requires only a relatively stable ambient temperature to be stored safely. There’s no need for a special environment for storing gold; the biggest restriction for gold storage is security. In comparison, storing antiques, textiles, artwork, and other assets require specific temperature and stable humidity conditions.

Gold is globally popular and important. As an investment, it is simple to understand, assesss and store.

In this beginner's guide to gold investing, we'll present an extensive list of the most common gold-related questions. 

The history of gold and gold investing

Humans have used gold in three primary ways: as treasure, as currency, and as a commodity.

Each one parallels nicely to different stages in world history. Gold was used as treasure first, before becoming the basis for many world currencies. Today, while gold is still treasured and used widely in fine jewelry, gold is most often used as an investment.

Gold as treasure

The oldest gold treasure in the world dates from 4,600 BC to 4,200 BC and was discovered at a Bulgarian burial site in Varna. That gives gold at least a 6,000 year history in human culture.

Since it was used in early civilisations as a form of status and to honour the gods to being used as currency, gold has been a constant shadow of the evolution of human cultures from the ancient to the modern world.

While gold wasn't used as a currency in the earliest days, as something precious it was often used as a tool for bartering or trading. 

The most common use of gold as treasure, of course, was as jewellery. The Pharaoh Tutankhamun was buried with hundreds of gold artefacts. The Bible records the use of gold decorations in the ancient Hebrew temple. Pieces of gold jewellery appear in hoards in the British isles, and of course gold continues to be used today as jewellery, most notably in modern wedding rings.

Gold as currency

The transition from "gold as treasure" to "gold as currency" began with the Byzantine Empire, lasting much of the middle ages. The empire used a solid-gold solidus as the base unit of currency, with lesser-value bronze coins as well. A second unit, the bezant, was also struck. The widespread use of these Byzantine coins spread also to other European nations, even influencing local currencies in what would later become France and England.

But despite these early instances of gold currency, there was no true gold standard until much later on. That's partly because it was silver, not gold, that was the most common metal for coinage and so became the common standard.

That would change with the rise of another empire - the British.

The rise of the gold standard

The idea of a gold standard was to tie all currency issued in a particular area or by a particular government to an underlying value of gold. Even when coins of a lesser value were used, or later when paper banknotes were issued, they could be backed or exchanged for an equal value of gold.

The gold standard relied on the lasting value of gold as a commodity and currency. Gold coins and gold bullion are quite heavy, so they might not always be exchanged directly - hence the use of other coins and notes in day-to-day transactions. But by adopting a gold standard, a government could tie its currency to the value of gold, which tends to stay consistent and vary little from day to day. 

The British were the first to adopt a formal gold standard. Various British colonies used the gold standard as early as 1704. Other countries and British colonies followed suit over the next century, till many of the leading nations of the world operated on a gold standard. 

In the US, the gold standard was formally adopted in 1791, shortly after independence, with the Mint and Coinage Act.

The fall of the gold standard

The difficulty with a gold standard currency is one of scale and size. Using gold in day-to-day transactions becomes cumbersome, so most countries issued fiat currency in various coins and paper notes, as a way of "representing" gold in a transaction.

But holding to a strict gold standard requires, at least in theory, that every unit of fiat currency be backed by gold holdings. As countries like the United States grew in population, that standard became harder and harder to maintain.

By the early part of the 20th century, countries like Britain and the US had already begun to move away from a gold standard. World War II accelerated that process.  

The two world wars had devastated the international financial markets and at the end of World War II, the global leaders came together to create a gold exchange standard for the world, linking it to the US Dollar. Established by the Bretton Woods Agreement, the gold exchange worked by allowing other countries to exchange US currency for gold from the U.S. Treasury. This rate was originally set at $15 to one gold ounce. 

But by the early 1970s, it became obvious that even a dilluted gold exchange wouldn't work. Under President Nixon, the exchange was weakened further. He set the rate at 30 USD to 1 ounce, and then removed the clause that guaranteed that the US would actually exchange currency for gold.

This marked the final end of a gold currency standard. But it didn't end humanity's desire for gold. Instead, gold became a commodity.

Gold as a commodity

Today, gold continues to be bought, sold, traded, and exchanged on global markets in more ways than ever before. Many investors view gold as its own asset class, with certain unique characteristics.

Nearly all the gold ever mined is still in circulation. The value of gold lies in its weight, not its form. If a piece of jewellery is ruined, it doesn't lose all of its value; it can be remade into a new form.

Gold has a unique influence on its own value. Gold has also tended to consistently rise in value, something that makes it highly appealing to investors. 

Gold investment FAQ

What are the options for investing in physical gold?

When most people think about investing in gold, bullion is what they think of - big, shiny gold bars locked away in a vault. Actually, gold bullion is any form of pure, or nearly pure, gold that has been certified for its weight and purity. Most bullion takes the form of gold bars and gold coins. The "gold bars" made popular in Hollywood movies are actually gold ingots, made by pouring molten gold into molds.

For investors in physical gold, gold bars and gold coins are the easiest to access. 

What are gold bars and gold coins?

Gold bars are issued by various mints. Each bar will be stamped with a design unique to that mint, and typically with a serial number. That number allows the bar to be certified and investors to know exactly what they are getting. Despite their name, most modern gold bars are roughly the size of playing cards.

Modern gold coins are also mint-issued and assessed. Available in smaller sizes, they are usually more liquid than larger gold bars or ingots.

What are the different types of gold coins?

Collectible coins, such as South African Krugerrands, Canadian Maple Leafs and American Gold Eagles, are the most widely available type of gold coins.

Why invest in physical gold?

Gold holds great appeal as a "safe" investment. It holds value well and is remarkably intact; a tonne of gold can be packed into a cubic foot. Gold isn't always liquid, meaning that the actual purchase and sale of gold can be difficult to achieve.

What are the challenges of investing in physical gold?

When it comes to physical gold, you'll generally be interacting with dealers outside of traditional brokerages, and you'll likely need to pay for storage and obtain insurance for your investment.

Physical gold also suffers from liquidity and fractional issues. You'll need to have the funds to purchase an entire bar or coin. There's no way to buy or sell a fractional share of a gold bar.

What is a serial number?

A serial number is commonly attached to gold bars as well, for security purposes. While heavy gold bars are an impressive sight, their large size (up to 400 troy ounces ) makes them illiquid , and therefore costly to buy and sell. After all, if you own one large gold bar worth £100,000 as your entire holding in gold, and then decide to sell 10%, you can't exactly saw off the end of the bar and sell it.

What is gold jewellery?

You may also opt to buy gold you can wear or that someone once wore but has been damaged in the form of gold jewelry.

When investing this way, be sure to buy investment jewelry from a reputable dealer and obtain as much documentation as possible. You'll also want to be aware of your jewelry's purity or gold percentage.

What are the alternatives to investing in physical gold?

Alternatives to invest in gold include buying shares of gold mining companies or gold exchange-traded funds (ETFs).

You can also invest in gold by trading options and futures contracts.

What is the reason for a rise in gold?

In times of economic uncertainty, people often turn to tangible assets in which to store their wealth in case of a market crash. Gold fits this bill nicely. It is easy to store, compact, and holds value. When inflation threatens to ruin the value of fiat currency, gold can be a reliable fallback.

With gold, perception is often reality. Gold seems to be the most reliable form of currency available, and so investors turn to it to hedge their bets. Gold lacks the volatility of the stock market, and so appears to be the better long-term investment.

What are the returns on long-term gold investment?

The most common point of comparison is between gold and the stock market. That comparison is a little tricky, because investments in each perform differently depending on the time period measured.

The 30-year performance of stocks versus gold favors stocks. in the time between 1990 and 2020, the Dow Jones Industrial Average increased 991%. The price of gold only gained 360%, less than a third of what the stock market did.

But even that comparison is a bit deceiving. If you look only at the last fifteen years, from 2005 to 2020, the price of gold rose 330% in contrast to the DJIA's 153%. Gold out-performed stocks by twice the margin.

Those flat gold prices also don't tell the entire story. They don't factor in the value of gold jewelry, or of an investment in gold ETFs or gold-related stocks like a gold mining company.

The bottom line

Should you invest in gold?

The answer lies partly in how you approach risk in your investment portfolio. 

Gold offers a mostly-reliable way to realize a good long-term return on your investment. If you prefer tangible assets, you can invest in physical gold assets like coins or bars. Or if you'd prefer something a bit more accessible, you can allocate funds to a gold-focused ETF.

However, if you're looking for the maximum possible return on your investment, you may be better with the broader stock market. You'll have greater risk, but potentially larger rewards.

In the meantime, most investors continue to use gold investments as a way to diversify their portfolios and provide much-needed stability and reliability. Those qualities are only enhanced during troubled or uncertain times. When things are going well, gold can actual lose value - as it did between 1989 and 1999, a time of general peace and prosperity.

On the flip side, when things start to look ugly, gold prices generally rise. It's viewed as an inflation hedge and a safe haven, and investors look for safe havens in financial storms. Does it hold up long-term? That depends on broader market and world conditions. But for the short- to medium-term, gold remains an appealing way for investors to diversify. And by investing in gold, investors are continuing a tradition as old as humanity itself.