What Are The Benefits of Gold In An Investment Portfolio?

The following is a scholarship essay I submitted to American Bullion. Hopefully this is a good example scholarship essay for you, or you find the topic interesting. Either way, I enjoyed writing it more than I expected and wanted to share.

In the 1911 edition of Miami Metropolis, Thomas Edison is quoted: “Gold has even now but a few years to live. The day is near when bars of it will be as common and as cheap as bars of iron or blocks of steel.”

In 1915, only a few years after Edison’s claim, gold was worth about $615 per ounce, adjusted for today’s dollars. By the end of 2025, according to Trading Economics, JP Morgan, and Goldman Sachs, gold as a commodity will have a value of approximately $3700 per ounce.

Clearly, Edison was more than a little incorrect in his prediction. Gold has proven to not only retain, but substantially increase its value since his time. He spoke as an inventor in a time of rapid technological progress, and so he assumed gold would be another casualty of that progress.

"We are already on the verge of discovering the secret of transmuting metals, which are all substantially the same in matter, though combined in different proportions." -Also Edison, in the same magazine.

But even the most experienced financial analyst cannot predict the value of any asset with 100% certainty. I myself learned a lot about this subject in the process of writing this essay. In fact, this scholarship has shaped how I will seek out and prioritize future scholarships. It required me to learn a great deal about a subject I might not have otherwise, expanding my knowledge base and giving great practice for research and composition. I appreciate the experience of crafting this essay, and I will try to find more scholarships like American Bullion’s.

That said, what did I find? Why should we take gold any more seriously than Edison did? What advantages does gold have as an investment in this modern world that has advanced so far past 1911, and yet values gold almost six times as much?

First, let’s look at demand.

Consistent Demand Keeps Gold Valuable

Gold sees consistent demand from technology, jewelry, central banks, and other financial institutions. There is no reason to predict any of these massive sources of demand disappearing anytime soon.

1. For technology, gold is used as an industrial metal. 80% of its demand in the tech sector comes from electronics manufacturing companies. Gold has a unique combination of chemical properties that make it invaluable in the production of high-end devices.

2. Jewelry markets provide the largest demand for gold in the world, comfortably taking up over 50% of all global gold demand.

3. Since the 2008 recession, central banks have experienced a strong push toward acquiring and holding gold as a reserve asset. New banks buy a lot of it, and established banks sell little if any. Their confidence and reliance on gold should speak for itself, setting aside the contribution it makes to the demand of this precious metal.

In order for this demand to stop being reliable, something would have to serve as an unlikely substitute for gold in technological manufacturing. Jewelry markets would have to defy all of recorded human history and lose an interest in gold products. Central banks would have to reverse course when, in times of crisis, they have consistently resorted to gold for their reserve of valuable assets.

Criticism of Gold as an Investment

Warren Buffet, chairman and CEO of Berkshire Hathaway and renowned investor, has criticized gold in the past. His thoughts on gold can be summarized as follows (paraphrased from his words at the 2011 Berkshire Hathaway annual meeting):

There are three kinds of investment. The first is currency, like dollars or pounds. This investment is essentially a bet on how the government that issues it will perform. An example is that using Japanese yen is a bet on the stability of the Japanese government that issues it.

The second investment is a bet that the asset itself will produce value. An example of this is buying a farm or a mine, in which the investment itself is hoped to produce something of value.

The third investment is a bet that, later on, someone else will make the same bet on what you’ve bought for a higher price than what you paid. This is where gold falls. When you buy gold, you are essentially betting that someone later on will buy it from you again, at a higher price than you paid for it.

The problem Buffet finds with the third bet is that unlike bet number two, it does not generate any value of its own, and unlike bet number one, it does not put faith in the market. In fact, it puts the opposite: by investing in something like gold, you are essentially betting that government currencies will falter. Investing in a market that you hope performs poorly is a bad idea.

To quote the vice-chair of the same company, Charlie Munger: “[It is] peculiar to buy an asset which only will go really up if the world really goes to hell. It doesn’t strike me as an entirely rational thing to do.”

After doing my own research into the benefits of gold, I think Buffet and Munger are missing the point of what is arguably gold’s greatest strength: a hedge against inflation.

Proven Power Against Inflation

Since 2021, the United States has had several of its worst years of inflation in this century (7% in 2021, and 6.5% in 2022). Since then, gold’s value is the highest it has been since Edison’s time.

Gold is a stable asset in times of high volatility, making it very attractive to investors during times of high inflation and other such events. Some say it has an inconsistent track record of increasing in value when fiat currency’s value is decreasing, but that doesn’t prevent gold from being an excellent hedge against that fiat’s decrease.

The 2020s are a good example of this, but so are the 1970s. The dollar’s high inflation in those years saw the “golden decade”, where the value of gold skyrocketed by 300%, aided, in part by an oil crisis. This illustrates gold’s potential as a hedge against inflation.

This power against inflation, as well as the reliability of continued and high demand from a variety of massive sectors, makes gold an excellent addition to any investment portfolio.