I want to retire early and live comfortably. Saving money will not be enough because of the instability of the global economy. Inflation, environmental disasters, and current health problems are barriers to my retirement dream. Thus, I have to find other ways to grow and protect my hard-earned money. Through my research, I have discovered that gold can be a great investment amidst economic uncertainty. Let me share what I have uncovered in ‘Why Invest in Gold’.
Table of Contents
- A Brief History of Gold
- Is Buying Gold a Good Investment?
- When to Invest in Gold
- 10 Reasons to Invest in Gold
- The Weakness of the US Dollar
- History of Maintaining and Increasing its Value
- Central Banks are Adding to Their Bullion Reserves
- Proven Hedge Against Inflation
- Gold is One of the Best Portfolio Diversifiers
- Bullion is Seen as a Safe-haven During Times of Political Instability
- Global Government Debt is Skyrocketing
- Negative Real Rates
- Gold Demand is Increasing
- The World Gold Supply is Shrinking
- How to Invest in Gold
- Types of Gold Investments
A Brief History of Gold
Gold is always associated with beauty, wealth, and luxury. It has been discovered and used since the early civilizations. Its attractive color, durability, and malleability are the primary characteristics that draw people. Millennium has passed, but its value is still the same. Gold will always be something precious that people covet.
It is one of the earliest metals known to man. It is even earlier than iron and copper, which are recognized for their significant contribution to civilization. Aside from that, gold is one of the easiest metals to mold. It is simple, even for ancient people with limited tools and knowledge, to customize it. Primarily, it is used as jewelry and decorative objects.
For some reason, people are naturally attracted to gold. Through trading, they have learned that gold is valued almost the same all over the world. This is why it became the first standard medium of exchange for international trade.
Not long after that, people learned to mold it into coins. This is the onset of the coin-based currency system. You must be familiar with pence, shillings, and pounds. Moreover, gold currencies were issued in different countries. In Great Britain, it is called ‘Florin’ while ‘Ducat’ in the Republic of Florence. Due to its globally-recognized value and widespread mining, gold became the basis of the world currencies.
Furthermore, a Coinage Act was passed in the US. This was a bi-metallic (silver-gold) standard. Aside from that, gold was used to back paper-currency systems. Though it ended in 1970, it is still a highly-reserved asset wherein ownership is held mostly by governments and banks.
Currently, it is still continuously mined. The removal of the gold standard did not discourage people from investing. It could be in the form of physical gold, paper gold, or gold stocks. When it comes to gold jewelry, it is mixed with other metals like silver, zinc, copper, nickel, and many others to make it harder. These combinations paved the way for different designs and variations of colors.
Throughout the years, you will notice that gold has always been a valuable commodity. Its consistency and stability make it more appealing to investors and would-be investors.
Is Buying Gold a Good Investment?
Advantages of Gold as an Investment
- It serves as protection against inflation. Money decreases in value almost daily. Although it is advisable to save cash for emergencies, the case is different for retirement. Several decades means that the value of your money will be significantly less. However, investing in gold is a different story. Its value is expected to continuously appreciate over the years.
- It minimizes the risk of investment. If you have investments in stocks and other financial instruments, buying gold to diversify your portfolio will be a good idea. Although those investments are not directly related, their negative correlation has been proven over the years. The 1970s and 2008 were great for gold but awful for stocks. The reverse happened during the 1980s and 1990s. You have to remember that investments carry both risks and rewards. Although you cannot extinguish all the risks, you can minimize their impact. Buying gold gives you the chance to earn more and prevents you from losing all of your money when the economy is not doing well.
- It has a limited supply. The law of supply and demand states that supply is inversely related to demand. When demand increases, supply decreases. A limited supply of gold will push it to increase in value. The World Gold Council states that there is more demand than newly mined gold. Furthermore, it takes time to find a gold deposit, establish a mine and bring it into production. It will take 10-20 years before a mine becomes fully productive. Nevertheless, the fact that it takes a long time to harness and its limited supply makes it rare and more valuable.
- It has an inverse relationship with the dollar value. A decrease in the value of a dollar prompts people to cling to the security brought by gold. This will lead to an increase in the price of gold. At a time of economic turbulence, your money might not be valued as high as it used to be. However, this will be a good time for investors of gold.
Disadvantages of Investing in Gold
- There is no regular income. Investments in stocks, bonds, and other cash equivalents earn a steady income. It can be in the form of dividends or interests. However, gold is not something that produces income regularly. You can only earn if you sell the gold at a much higher rate.
- There are storage and insurance issues. Since gold is a high-value and precious metal, it needs insurance and storage with proper security. Thus, you will incur additional costs. It can be stored in a safe deposit box in your house. A bank locker might be a better choice if you want additional security. Of course, you have to pay maintenance charges. On the other hand, the abovementioned storage places might not be available if you consider investing in and with gold IRA companies. A gold ira custodian is necessary but the company must be approved by state agencies to offer this kind of service.
- There is a risk of loss. Like any other investment, gold has its ups and downs. It was mentioned beforehand that a decrease in dollar value pushes the gold price to go up. But when the dollar has recovered, it may cause the gold to decrease in value. On the other hand, refusing to invest does not carry this kind of risk. Even so, it guarantees a loss due to the general decline of purchasing power of the currencies. If you let your money stay stagnant in the bank, it will be subjected to the full effect of inflation.
Why Gold is the Best Investment
- It has a good potential for growth.
- It is easy to buy and sell.
- It can be used as a hedge against inflation.
- It can be used to diversify a portfolio.
- It will always be a precious commodity.
When to Invest in Gold
No one can say when is the right time to buy gold. It depends on the investors in terms of their purpose and risk tolerance. Ideally, the best time to buy gold (or any other investment such as stocks or real estate) is when it has a lower value so that when the price goes up, you will gain more income.
What Form of Gold is the Right Investment for You?
Similar to the above, the right kind of investment depends on the investor. If you want something that you can hold physically and be able to buy and sell easily, gold bullion, coins, and jewelry are a suitable investment for you. However, you must be willing to shoulder the cost of storage and insurance.
On the other hand, if you want to invest for retirement, gold IRAs might be better for you. As long as that money is exclusively reserved for retirement and you will not need it anytime soon, you will be able to maximize its benefits. Besides, there are tax advantages offered for this kind of investment.
Paper gold is for investors that do not want the hassle of storage and insurance of physical gold. It is easy to buy and sell. Pay the brokerage fees, and you are good to go. However, its price is not dependent on the value of physical gold. It is determined by the issuer and the conditions associated with the issuance.
If the investor likes investing in stocks, gold is also available in the stock market. You have to remember the risks and rewards are similar to any other stock. There is an ease of entry and exit in the market. Moreover, it is more liquid. You can sell it whenever you want as long as the market is already open.
It would be best if you establish your financial goals. This will affect the type of investment you have to make. Moreover, you have to educate yourself continuously. Do your research. Do not rely on a single article. In this day and age, you don’t have to worry too much about the availability of information. It is on the internet!
Also, do not forget to ask the experts. They may suggest a better investment option that will cater specifically to your needs. It is your money, and you work hard to earn it. Make sure that you use it for the right kind of investment.
10 Reasons to Invest in Gold
The Weakness of the US Dollar
We can say that the US Dollar is weak when its value falls relative to other foreign currencies. One currency that is frequently compared with the US Dollar is the Euro, so if the latter increases in value against the US Dollar, it could mean that the US Dollar is weakening. This has already happened sometime between the years 1998 and 2008.
As a result of this weakness, people turn to gold for its security, which drives up gold prices. During those not-so-nice years for the US Dollar, gold prices almost tripled as they reached $1,000 per ounce. On the other hand, between the years 2008 and 2012, the cost of gold nearly doubled, reaching over $2,000 per ounce. The US Dollar’s weakness is caused by various factors such as the country’s trade deficits and a huge budget and the money supply’s considerable rise.
History of Maintaining and Increasing its Value
In contrast to coins, paper money, and other commodities, gold has retained its value over time. People view gold as something that they can turn to protect their wealth and pass it down through generations. For ages, people have admired this particular precious metal because of its unique properties. These special properties include ductility and malleability, making it easy to form coins out of it. Furthermore, in contrast to other elements, gold has a distinct and stunning color.
Central Banks are Adding to Their Bullion Reserves
As geopolitical tensions and trade continue to rise, growth slows, and countries attempt to diversify their currencies away from the US Dollar, central banks are now increasing their bullion reserves. In the global market, this has become a more prominent trend, providing extra support for prices.
Proven Hedge Against Inflation
Since gold prices in US dollars fluctuate, it is generally regarded as an inflationary hedge. This means that whenever the US dollar decreases in value because of inflation, gold tends to be more costly. As an effect, gold owners are protected against inflation as gold is inversely affected by inflation.
Gold is One of the Best Portfolio Diversifiers
A portfolio diversifier is an extension to your investment portfolio that lowers the overall risk. Because diversification helps investors achieve the amount of return they desire without taking on as much risk as they would with single security, it is considered a crucial feature. This precious metal is regarded as a good portfolio diversifier. This is because it is not related to other financial instruments such as bonds, stocks, and commodities.
Bullion is Seen as a Safe-haven During Times of Political Instability
Gold has always been regarded as a haven for people. A safe-haven investment is described as a helpful addition to a portfolio by overcoming volatility and providing it with diversification.
Global Government Debt is Skyrocketing
While the international community may have overlooked the negative impact of skyrocketing government debt on our economy, we will still need a weapon to defend ourselves against the financial chaos that could arrive anytime. This weapon could be none other than gold since it serves as a hedge against those unforeseen scenarios.
Negative Real Rates
People are more inclined to prefer gold over any other financial securities when debt funds have a negative real return rate. Gold is said to be a permanent 0 coupon bond that retains all currencies’ purchasing power because it cannot be freely printed.
Gold Demand is Increasing
It’s a given that demand and supply influence any traded commodity. Gold, unlike oil, does not perish. Also, each year’s mined gold is not particularly large. As a result, if gold demand rises, the price rises because supply is relatively limited.
The World Gold Supply is Shrinking
Just like everything else that exists in this world, gold may eventually run out. Because of its limited supply, gold prices will continue to rise.
How to Invest in Gold
Buy Gold Directly
Ordinary investors find it easier to purchase gold than any other commodity. This is due to the availability of many precious metal dealers that allow them to buy gold directly. Bullion bars come in a range of sizes. You can purchase a quarter-ounce for 400-ounce bullion.
Today, however, investors seem to prefer gold coins. These coins are different from the classic numismatic coins, and their gold content and premium determine their prices. Gold coins must be kept secure, and don’t forget to insure them as well. Make sure that you buy from a trusted dealer, either online or in person.
If you can’t buy gold directly, gold mining stocks are a great alternative. However, note that gold shares do not always move in lockstep with gold prices since mining companies’ success is based on their operating performance, how they utilize their resources, and how they make money. The downside of this is that your investment is not safe since you don’t have physical possession of it.
Gold Futures and Options
Another way of investing in gold is to buy gold options and futures. In these contracts, the financial instruments involved are either gold futures or physical gold. One advantage of buying gold options is that you can use them to get gold at lesser up-front costs than purchasing physical gold.
Invest in a Gold ETF
A gold exchange-traded fund (ETF) holds gold as its primary asset. ETFs are quite similar to single stocks, so that you can trade both of them on stock exchanges. ETFs enable investors to gain access to gold without the costs of storage, markup, as well as security risks associated with physical gold.
Types of Gold Investments
Physical gold is typically included in people’s investment portfolios. Gold bullion, gold coins, and gold jewelry are all examples of physical gold investment. The benefit of investing in physical gold is that it can be owned directly by the investor and retain its value. Physical gold is also easy to purchase and sell in the market.
Anyone can even buy it easily from any jewelry store in your region. However, it is wise to purchase gold from reputable jewelers who can give you a guarantee card or certificate. It’s worth noting that you can also obtain gold coins from banks since they sell them as well. Perhaps the most significant benefit of purchasing physical gold from reputable dealers is that you can get it without the usual risk.
You will receive appropriate receipts that you can use in the future. It does not need any upkeep on your part as you can store it for a very long time. The downside is that privately-held gold has little liquidity, and its price is usually higher because of the processing and delivery fees.
Unlike physical gold, paper gold has no intrinsic value because its worth is determined by the issuer and the issuance conditions rather than the corresponding gold alone. Paper gold can be purchased and sold fast. It just takes a few mouse clicks or a telephone conversation with a broker. On exchanges, they are openly traded, and you can make a purchase or sale at any time within market hours. Paper gold prices are transparent. There are no setup fees or premiums to pay. You have to spend a little on the 0.5 per cent brokerage fee. However, paper gold is susceptible to market risk.
Investing in gold stocks is just like investing in any other type of stock. Gold stocks are typically linked to physical gold prices, but they are often vulnerable to other risk forms. Gold stocks are also more liquid than different types of gold investment. When you invest in gold stocks, you have three options: ETFs, gold certificates, and gold mining stocks. Gold mining stocks are shares of a company that engages in gold mining. They can be bought and sold on stock exchanges together with other stocks.
On the other hand, you can trade a gold ETF in several gold mining firms. Just like other ETFs, a gold ETF provides immediate diversification by spreading the risk across multiple firms. A gold certificate is not as common as it once was. It isn’t a stock, but an official document that proves that you have gold even if you have no physical possession of it. It could become worthless if the company that provided the certificate goes bankrupt.
Every type of gold investment has its advantages and disadvantages. You must assess each of them and choose the one that best suits your needs.
When all else fails, gold is an investor’s haven. If you are worried about your country’s currency depreciating or inflation, gold would undoubtedly be a great addition to your investment portfolio. However, before you invest in gold, make sure you fully understand the particular gold investment you’re interested in.