Why do people invest in gold?
Traditionally, people have invested in gold when there are uncertain times. These could be when basic commodities rise, times of political and social unrest, or when people seek security for their investments. Gold has been seen as a protection from the effects of inflation. Gold also appears to be something “real.” A gold bar sitting in your safe, or a collection of gold coins have a physical presence unlike any kind of digital investment. This can be comforting when huge uncertainty is on the rise.
In today’s world, these reasons may not be as valid as they once were, and most financial advisors would recommend that the percentage share of your total portfolio, that is invested in gold, should not exceed 10% – 20%. Gold prices may well be as unpredictable as the stock market, and sometimes even more so. The traditional goal with the physical commodity was to beat any potential inflation of the dollar.
Since 2013 the price of one-kilogram gold bars has varied from $35,000 to $45,000 which is quite a difference. A gold bar is much more convenient than gold coins and easier to track the value. However, they are harder to sell than coins and you have to sell the whole bar at once, you cannot sell a small part of your investment like you can with coins. If you do buy coins, buy ones that are commonly circulated and have a known value rather than rarer ones.
Ways of investing in gold
Most Gold dealers will not accept card payments and you should use cash, electronic transfer, or arrange a cashier’s check to make your purchases.
You may mistakenly believe that investing in gold necessarily involves purchasing a physical piece of gold. In reality, you may just receive a certificate or other document. There are three primary ways of buying gold
1. Buying an ETF (Exchange-Traded Fund)
2. Investing in a mining company
3. Buying a physical piece of gold
ETF
The ETF is very much like any individual stock and is traded at the exchange in the same way. The fund holds contracts that are backed by gold, so technically, when you buy ETFs you do not own any gold, but your investment is backed by gold. This is a way to get exposure to the gold market but still subject to stock market potential fluctuations. You could use this ETF as a diversification measure against the inflation of the dollar.
Investing in a Mining Company
Gold Mining stocks are a way that you can invest in a mining company. This means that your investment strategy is based on the success of that particular mining company. This can be a risky investment.
Buying Actual Gold
You may choose to buy physical gold. This might be in the form of buying Gold Bars, Gold Coins, or even jewelry. Buying gold bars is a big investment and if you later choose to liquidate your gold assets they can be harder to sell. Gold coins are easier to manage as you can sell some coins and retain others. Gold Jewelry, a traditional investment, is inefficient as you pay for the jewelry to be made and you pay more than the actual gold is worth.
Bear in mind that once you buy actual gold you will need to store it safely, to protect it from theft. The optimum storage is to use a bank-safe deposit box. Keeping gold in your house is likely to result in a higher home insurance premium.
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Tips for investing in gold
Beware, there are a great many scams online that purport to be selling gold. Do not purchase gold from unreliable websites, choose a reputable dealer.
Do not regard investment in gold as a method of investing short-term, gold can go up and down in value and you may need to wait before you can sell it at a profit.
One investment strategy is to buy a small amount of gold coin each month, no matter what the price, this will assist in helping you ride out the rises and falls in the market.
Bottom Line
Many of the reasons that people traditionally invested in gold are no longer as true as they once were. Research has shown that Treasury Inflation-Protected Securities (TIPS) do a much more efficient job of protecting from inflation.
If trying to protect yourself from troubled times, Gold may well rise in value during a crisis, but typically shrinks in value once the problems have passed, sometimes to less than you may have purchased the gold for. Often gold investors end up holding gold for much longer than they originally planned while waiting for the next price rise.
Whatever you plan to do regarding gold, it is most certainly prudent to limit your investment to less than 20%, probably nearer 10% of your portfolio.
My Final Take
Investing in gold can be very expensive. Historically, it has been considered a hedge. However if you invested in gold in January of 1980, the equivalent price, adjusted for inflation was over $2500 per ounce. Now gold is just over $1800 per ounce. In this scenario, had you bought gold in January of 1980, you would still be in a negative return. In a general sense, buying gold can be a hedge. It is also one of the asset classes. Investing in gold is part of the commodity asset class. Along with investing in other precious metals. Please review my article on investing in silver for another option in the precious metal investing category. Investing in Silver could be another hedge against inflation.
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