Investing in Gold: A How to Guide
- Reason Why You Should Invest in Gold
- Best Ways to Invest In Gold
- Advantages and Disadvantages of Investing in Gold
- Disadvantages of Investing in Gold
- Conclusion- Is Gold a Good Investment?
Its limited supply makes it an excellent choice for investors who wish to hedge themselves from the adverse effects of inflation. Investing in gold is popular and doable for the average investor. You just need to know how to do it right.
Reason Why You Should Invest in Gold
Now that you know that gold is an excellent addition to your portfolio, here are a few more reasons why you should continue investing in gold:
- Hedge: A hedge is an investment that offsets losses from another asset. Often, investors buy gold in a bid to hedge against the decline of currency. As a currency drops, it increases the prices of imports and causes inflation. Gold, is immune to inflation, and therefore, can be used as an excellent hedging tool.
- Safe Haven: A safe-haven typically protects an investor against a possible catastrophe. For instance, during the financial crisis, a lot of investors turned to gold as a safe-haven. The price soared from $869.75 to a whooping high of $1,895 on 5th September, 2011.
- Direct Investment: As depicted above during the 2008 financial crisis, the price of gold exponentially rose to a new price. Investors wanting to profit from this new price, sought to buy it as a direct investment as a way of taking advantage of any future price rises. Others, buy it with the sole goal of straining the supply of gold. They believe that continued scarcity will push up the prices to a new high.
Best Ways to Invest In Gold
There are so many ways that you can invest in gold. They include:
- Buying Gold: You can purchase physical gold in the form of gold bullions or coins. The downside to owning physical gold is that you’ll have to pay for storage or insurance. The upside is that gold is valuable anywhere in the world. You can use anywhere that you are.
- Buying Shares in Gold Company: Another way to invest in gold is investing in a company that produces gold. Their stocks usually correlate with the gold’s value. Furthermore, there’s a chance you may get dividend pay-outs on your shares.
- Gold Options and Futures: You don’t necessary have to own gold in its physical form. You can invest in gold indirectly through financial derivatives. However, like other derivatives, gold futures and options are risky. The chances of making huge returns or making losses is 50-50.
- Gold ETFs (Exchange-Traded Funds): It’s an exchange-traded fund that specializes in investing in a number of gold securities. Some of the most popular gold ETFs include iShares COMEX Gold Trust and streetTRACKS Gold Trust. Diversification in gold ETFs helps minimize your risks.
- Gold Certificates: These are certificates that allow you to hold gold without the hassles of storage, security, or insurance. The certificates represent ownership, just like a title deed to land. They are of two types: allocated and unallocated. The allocated gold is safely held within an account while the unallocated gold is a promise made to you that gold will be produced once you ask for it.
- Digital Gold: You can acquire a digital gold account through a bank. In this account, you deposit your cash and then the bank converts it into equivalent gold units. Thus, your currency will be in the form of gold ounces, grams, and milligrams. The benefit of having such as account is that:
- You can speculatively hold this gold and convert it into currency later once it appreciated in value.
- You can acquire a debit or credit card backed up by digital gold. Such types of card are accepted nearly anywhere.
- You can purchase items online through a variety of vendors that accept this form of currency.
Advantages and Disadvantages of Investing in Gold
Although gold isn’t a primary form of currency anymore, it’s continues to remain a popular invest choice for a variety of reasons. Some of these include:
- Highly Liquid: Gold can be converted to cash anywhere in the world. It’s liquidity and universality is unparalleled.
- Valuable: Gold tends to maintain value over long periods of time. Experts tend to argue that even when the price of gold drops, the new price is not indicative of its true value. They argue that the underlying value of gold never changes at all.
- Best Hedge against Inflation: There is a relationship between gold and inflation. When there’s inflation, the value of gold tends to rise. Therefore, during times of inflation, gold is a more stable investment than cash.
- Diversification: Adding gold to your portfolio is an excellent choice. Often, gold moves inversely to the shares and currency market. Therefore, having it in your portfolio is an excellent way to lower the risk of losses to your investments.
- Universally-Accepted: Gold is universally accepted. Although stocks and currencies are also available and accepted globally, they are much more subject to various factors such as political chaos, which gold is immune to.
Disadvantages of Investing in Gold
Although the above advantages make gold a great investment instrument, be aware of the risks of investing in gold. They include:
- Gold Doesn’t Earn Passive Income: Unlike stocks and bonds which provide passive income in the form of dividends and interest, gold only creates value if it rises in value and you sell it.
- Physical Gold Needs Storage, Insurance, and Protection: Obtaining physical gold has added expenses such as paying for storage and insurance. Otherwise, without both, replacing damaged or stolen gold becomes difficult.
- High Taxes: Capital gains tax rates are higher for gold than they are for other assets. For instance, in the US, the capital gains tax rate for gold is 28% which is higher than the ordinary capital gains tax rate of 15%.
Conclusion - Is Gold a Good Investment?
Gold is a great and profitable investment option when other assets are failing. If you are particularly concerned about inflation or currency devaluation, then you’ll find as a great portfolio addition. But be aware, as tempting as it may be to buy gold in large quantities, remember to prevent yourself from over-investing in one particular asset class. The key to success is having a well-balanced portfolio.