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INVESTING IN GOLD

WHY INVEST IN GOLD

For centuries, there has been limited information surrounding investing in gold, but that is rapidly changing. The world is becoming more open to investing in gold, with many capitalizing on the stability and limited supply and demand. The unique and long-standing value asset isn’t like other traditional investment options and requires that you do extra research before putting your money in any related investment vehicle.

Understanding where the demand for gold comes from is one of the crucial steps to a successful investment because it influences the price of the commodity. The price can then show you the value of the US dollar. Gold is also a real asset, unlike stocks and bonds that are financial assets.

Types of gold investment

Physical gold

This is a direct gold investment that involves the purchase of gold bullion as a gold bar or gold coins from the u.s mint like the American buffalo. The value of the gold you buy will depend on its quality, age, condition, and rarity.

Some of the responsibilities that come with owning these metals are insurance, transport, and storage. The main benefit is knowing that you own the products and won’t have to deal with counter-party risk that can affect them.

Gold stocks

Gold mining companies usually give shares for gold mining stocks. They typically have fixed stock prices, but sometimes the gold stocks fluctuate according to the market gold price. The main benefit of this type of gold investment is that you can earn dividends the same way you would with other asset classes.

Paper gold

Gold exchange-traded funds emerged after exchange-traded futures and options and have gained a lot of customers ever since. The option allows electronic trading of gold, which tends to be more convenient and cost-efficient for most investors. It may link you to the traditional financial system, which means you have to consider your reasons for investing in paper gold or physical gold.

Exchange-traded funds and commodities

ETFs are one of the ways that allow you to buy gold assets without having a physical product. You will keep tabs on the underlying prices to determine how your investment is performing in the gold market. The advantage is that they are very liquid.

If you’re not interested in ETFs, you can invest in gold certificates.

Gold mining companies

Investing in gold and a gold mining company using this option can be in stocks or focused mutual funds. Gold mine operation can be risky, but it makes it easier to track gold prices. Investment portfolio diversification is also more achievable with mining because of exposure to other commodities.

Gold IRA

Another way of investing in gold is through a gold IRA, and in particular a gold IRA rollover, which is a recently introduced way for investing in gold. It is the process of transferring a portion of your IRA investment / 401(k) into a Gold IRA (or other precious metals such as silver, platinum, and palladium).

A gold IRA rollover is not limited to IRA holders. A 401(k) retirement plan, entitles you to roll over some or all of your funds into a precious metals IRA. There a numerous gold ira companies that offer this service.

Why invest in gold as a precious metal

Weaker dollar value

The US dollar may be one of the essential currencies in the world, but when its value falls against other currencies, business owners suffer. In such a situation, the value of gold continues to rise and gives investors cushion against the dollar currency.

Information surrounding the fall of the dollar between 1998 and 2008 shows that the price of gold rose to between $1,800 and $1,900. It proves that when the other currencies are in economic unrest, gold increases or maintains its value.

Banks are paying attention to bullion reservesinvesting in gold bars

Banks have been trying to diversify their reserves since 2010, and some are already offering bullion products and services to their customers. Data from the world gold council shows that the net purchases from banks reached 371 tons, which is a good sign for investing partners.

Proven hedge

Over time, gold has proven to hold its value when inflation reduces money value and increases the cost of living. Over the past five decades, the price of gold has increased every time the stock market plunges.

Portfolio diversification

Putting your money in the gold market is the best portfolio diversification strategy you can use because of its ability to withstand political instability, economic distress, and low correlation with other asset classes. That is why sometimes it is called a Crisis Commodity.

Increasing demand and global government debt

Emerging market economies have increased the demand for gold in recent years. Middle-class customers continue to purchase gold in the form of jewelry, which is expected to continue. Because gold is one of the scarce but finite products, this trend makes it even more valuable. As such, you should always have a clear objective when you invest in gold. If possible, split your money into three main categories of gold investment. They are:

Strategic asset allocation

It is designed to give you additional returns regardless of the risk. The category relies on the low correlation of gold to other assets.

Tactical asset allocation:

This is where a portion of your portfolio is constantly moved between safe and risky assets.

Trend following:

It follows the trending gold prices instead of fundamental analysis to invest.

 

WHAT ARE THE PROS & CONS OF GOLD INVESTMENT?

Let’s take a more detailed look at a gold investment with regards to the pros and cons.

THE PROS TO INVESTING IN GOLD

A Shelter Against Volatility

The answer to why an investor should consider gold investments is multifaceted. The first reason to invest is that it can be used as a hedge of protection against market volatility and inflation. Market volatility can affect the value of gold, but it typically affects it much less than other types of investments. One of the reasons for this is that the value of stocks, bonds, and ETF’s are based on money and not in gold.

Protection from Inflation-Deflation

Inflation has always been a concern because inflation weakens the value of paper money. However, gold does not labor under the same constraints as money. It has a value that is established mainly through demand. Money can be weakened when there are shifts in power from one country to the next, or when there is some sort of political upheaval. In some cases, money can be rendered completely worthless, should the affairs of a particular country get bad enough. It is in these situations, gold benefits the investor.

Gold has had a remarkable performance during times of inflation and also deflation. Inflation is basically a period when the economy of a nation is struggling and the cost of living is high. During these times, gold prices tend to increase and that’s why it is often regarded as a ‘hedge against inflation. Deflation, on the other hand, is when the economy is also struggling and business activity is quite slow. During deflation, it has been seen to perform well too.

Value

Another thing to consider when looking to invest in gold is its value. As you can see from the price chart below, the value of gold did skyrocket some years back, at one point reaching the price of $1877 per ounce in August 2011. Since then it has slipped to around $1060 per ounce in December 2015 (The current gold price can be found on our gold price page). Since then its value has risen to its most recent high of $2030 in August 2020. There is some discussion as to its value throughout the rest of 2021, with Goldman Sachs seeing gold rising back above $2,000 per ounce in 2021, with a potential to hit a new record of $2,300 based on current conditions. Other investors feel that while gold may not rise to this level, its values will steadily increase throughout 2021. Regardless, gold is at a good value, and purchasing gold at current prices may be a wise investment as it is poised to increase in value, both in the short-term and the long-term..

gold prices over the lat 10 years
Histroic Gold Price Over Last 12 years

WHAT ARE THE CONS TO INVESTING IN GOLD?

While we do think that gold is a good investment, there are downsides to investing in gold, just like there are downsides to investing in anything. Therefore you really must consider your reasons as to why you want to invest in it or any other of the precious metals, before you start out.

It doesn’t produce cash.

What we mean by that is, if you are looking to invest for the sole purpose of generating cash on a regular or short-term basis, gold is not the investment type you want. Precious metals don’t pay out a dividend, therefore if that is what you need to consider stocks.

Don’t think of it as a short-term investment

OK, we all know that you make your money when what you have invested in increases in value. While Gold has increased considerably in value over the past 20 years, over a limited time frame we see the value of gold bounce in both directions. We are not saying you can’t make money short term, if that is what you want to do, you are going to have to be checking its price almost like a Hawk on a day-to-day basis. But if you take the view that investing in it is for the long-term and it is for diversification, then you can buy it and leave it alone without stressing as to whether it’s going to make you any money tomorrow