We are going to start this article off with a quick, guess the word game.

I am going to give you a total of 8 clues, which I’m hoping will help you uncover the word I am referring to, which will be the subject matter of the topic I am going to write about this week.

Some clues might be more obvious than others but if you figure out the word from the first four, then I'm seriously impressed. Here they are;

• October
• 79
• 21%
• King Croseus

Any idea?

OK, how about, these four:

• Sutter Creek
• $1,339.80
• Au
• Sergeant Bosco Albert Baracus

It's a tough one alright, and for those who didn't figure out the answer, the word I was looking for is GOLD.

Let me quickly make sense of those clues before I go on.

• October is the month of the year that sees the highest global demand for gold.
• 79 is its atomic number
• 21% is the amount physical gold has appreciated in value by in the past 12 months'
• The first pure gold coins were struck during the reign of King Croesus of Lydia in 1100 B.C.
• On the 24^th January, 1848, James. W. Marshall saw something shiny in Sutter Creek, California. He discovered gold which led to the American gold rush.
• $1,339.80 is what it would cost you to buy an ounce of gold at the moment
• Au is its chemical symbol
• And Sergeant BA Baracus of the A-Team wore a lot of it around his neck and on his fingers

I am asked quite frequently whether gold is something people should consider investing in. And the reason for this is largely driven by poor rates for money on deposit, and the continuing volatility in the stock market, driven largely by Brexit, the US election and fears over what’s happening with the Chinese economy.

If you invested in gold recently, you will have done very well, because year to date the price has rocketed by 21% from $1,054 an ounce on December 1^st to its present price of $1,339. And this is typical of what happens to gold when stock markets go through turbulent periods or when there is political uncertainty and world tensions rise. For all these reasons, gold has become known as the “crisis commodity” because investors buy it for its relative safety.

But there are other reasons why investors buy gold, and they do so, not as a standalone investment, although I am sure there are those who do, but for most, the reason they buy gold is to use as a safety net against other investments they have. Gold acts as a hedge (it reduces their risk) against other assets like property, equities and bonds which may go down in value.

Another reason why gold is bought is to protect against inflation and falling currency values.

And this is one of the reasons many people particularly in the United States continue to say that when President Nixon took the country off the gold standard in 1971 it was one of the worst economic decisions ever made and some said it changed the rules of money for ever.  

The gold standard for those too young to remember was a system where a countries currency had a value directly linked to gold, where they would agree to convert paper money into a fixed amount of gold. So, if a country set the value of gold at €300 an ounce for example, then the Euro value would be 1/300^th of an ounce of gold.

Robert Kiyosaki, author of Rich Dad Poor Dad, said, because of Nixon’s actions, “the dollar died because it no longer became money, it became a currency, and there is a big difference between money and currency." He argues that a currency needs to keep moving, if it doesn't, it stops and loses value, and when a country or institution starts flooding the market with lots of money, it devalues money at an even faster rate.

And it's hard to argue against this because in Ireland the average rate of inflation has been 4.1% for the past 30 years. And to demonstrate what this means in real terms is to show you that the price of a pint of beer back in 1971 would cost us in today's terms about €38.97. The cost therefore has increase by 1510% over the past 45 years.

When you look at investing money, you are looking at getting a good return, one that at least outperforms inflation otherwise as you can see, your money will go down in value. And, typically when interest rates are low, the value of gold goes up (Another reason why gold has performed so strongly in recent times) And when interest rates increase, and you could get more on deposit than what the rate of inflation is, gold will drop in value. 

Over the past 10 years it has increased in price per $/oz by 127.73%, and over 365.09% in the past 15 years. So it would appear to be a very good long term investment. But as is the case with a lot of investments, timing and luck have a part to play.

In the 70’s for example, the stock market performed terribly but gold did great. In the 80’s and 90’s, the stock market soared and gold tumbled in value. And when markets crashed in 2008, investors went to the safety net of gold and because of this, its price doubled. So you have got to be cognisant of this and make sure you don’t invest all your eggs in one basket, because there are so many things that are beyond your control which could affect its value.

Another reason why people invest in gold and it has nothing to do with Donald Trump or inflation or very poor interest rates but everything to do with the potential failure of a bank. And if you you’re your minds back to Cyprus in 2013, this is exactly what happened. They let their second biggest bank fail and imposed a levy of 47.5% on anyone who have savings greater than €100,000 in their other bank.

What this means, and it is the new reality for us since June 2013, is in the event an Irish bank fails, depositors may be forced to incur losses, depending on how much they have on deposit. So rather than a bank getting a bail out, it will instead, receive a bail, which is another reason why gold is attractive to some.