Gold has long been a valuable asset. It was used as a form of currency and a mark of prosperity and status throughout history. The precious commodity has been discovered buried among human remains dating back to 4,500 BC, which indicates that it has been used for centuries.
This implies that gold has proved to be consistent and desirable throughout time. Investors consider it to be among the safest investment vehicles, as it typically recovers quickly from dips in value during economic downturns. The price of gold often moves in the opposite direction of the stock market or economic fluctuations. Buying physical gold is a traditional investment option that offers flexibility in resale but comes with risks like price volatility and taxation on profits.
If you’re considering a gold investment, you may be wondering whether it is a good idea. In this article, we’ll walk you through the benefits of gold investing so you can make an informed decision.
Why Should You Invest in Gold?
To answer the question “Does gold make a good investment?” we’ll look at why this precious metal has become so popular among investors around the world.
It is also important to consult with a financial advisor to evaluate your individual circumstances and develop an appropriate investment strategy.
1. Gold Can Be Used as a Hedge Against the Dollar
When investors expect a weakening US dollar and increasing inflation, the belief that gold maintains its value is even more important. Gold has traditionally served as a hedge against both of these occurrences since it typically rises in value with increasing inflation.
Once investors discover that their money is decreasing in value, they will begin to place their bets on a tangible asset that has historically held its worth.
Since gold is priced in US dollars, it benefits from a weakening US dollar. This association exists for two reasons.
Firstly, investors interested in purchasing gold must first trade their US dollars. As a result, the price of the dollar falls as international investors attempt to move away from the currency.
Secondly, a weaker US dollar makes gold more affordable for investors holding other currencies. Therefore, the demand from investors who have currencies that have increased in value against the US dollar will rise.
2. It's a Great Way to Diversify Your Investment Portfolio
Gold is generally seen as a diversification investment. Whether you are concerned about inflation, a weakening US dollar, or even safeguarding your wealth, you can benefit from a gold investment.
It can be a great commodity to invest in if diversity is your goal since it is unrelated to other investment types, such as bonds, stocks, or real estate.
Exchange traded funds (ETFs) are a popular choice for beginners looking to invest in gold, offering a way to gain exposure to gold without needing to buy physical assets.
Investing in a wide range of commodities ensures that if the market collapses and you make a loss on one investment, another investment will make up for this loss. Since gold has proved to hold its value over time, it is a great way to diversify your portfolio
3. Gold Is Considered a Safe Haven
Economic and political instability is becoming increasingly evident in our current economic climate. Amid this instability, investors often look to gold as a safe haven. Great powers have fallen apart, political regime changes have occurred, and currencies have fallen throughout history.
During these times, gold investors were able to secure their assets effectively and, in some circumstances, even use this financial asset to flee the mayhem. As a result, if current events suggest a global economic concern, investors often turn to gold as a safe haven. Buying gold could be a fantastic way to stay afloat during economic turmoil.
4. It Can Be Used to Preserve Your Wealth
Because gold has effectively stored wealth for countless generations is one of the reasons for its relevance in the current economy. The same does not apply to currencies.
An ounce of gold was worth $35 in the 1970s. Assume you had the option of storing an ounce of gold or merely retaining the $35 at the time. They both could purchase the same items for you since they had the same value.
However, if you could have one ounce of gold today, you could still use it to make the same purchases, but since the value of the dollar has decreased, you couldn't make the same purchases with $35.
Therefore, holding $35 rather than an ounce of gold would have cost you a lot of money. This is because the value of gold has climbed while the value of one dollar has decreased due to inflation.
5. Gold Is Liquid
Unlike other forms of investments, gold has high liquidity. Since there is always a demand for gold, you can easily sell your gold. You could choose to sell to a jeweler, pawn shop, an online dealer, or a private investor.
This process is faster than selling stocks on the stock market since the transaction is often complete within three business days. It also means that gold is a good investment compared to investing in antiques or collectibles because selling it will be much easier.
High liquidity lets you take your gold assets anywhere in the world because it is sought-after and recognized as a store of value around the world.
6. You Don't Need to Be a Skilled Investor
The truth is that other investments require a certain level of skill or at least some form of knowledge or experience. However, anyone can invest in gold – you don’t need any special training!
While gold funds, stocks, and futures may require some skill, owning physical gold, such as bars and coins, is a straightforward investment option that doesn't require any expertise to enjoy all the benefits gold investments can offer.
How to Invest in Gold
There are several ways to enjoy the benefits of gold. In the section below, we’ll look at some of the ways you can invest in this precious metal. Additionally, investing in physical precious metals can be an option, though it comes with potential for both short-term and long-term price volatility.
1. Purchase Physical Gold Bullion in the form of Gold Coins or Bars
One of the most obvious ways to invest in gold is to purchase physical gold in the form of gold bullion. Bullion refers to a physical gold coin or gold bar with a 99.5 to 99.9 percent purity. Some examples of popular gold coins are the Canadian Maple Leaf and the American Eagle coins.
Gold bullion is sold in bars ranging in size up to 400 ounces and in the form of gold coins. Given the current gold price of roughly $1,900 per ounce, a gold bullion investment is a costly prospect.
If you buy gold, you can enjoy all the benefits we mentioned above, but you have to remember that investing in this valuable commodity by buying it outright isn’t a passive way to make an income.
You can only enjoy a profit when you decide to sell your coins or bars. Moreover, you will also need to consider storage options, which can be quite costly.
To purchase physical gold, you’ll need to find a reputable dealer that can verify the purity of the gold. We also recommend obtaining an insurance policy to ensure that you are covered in the event that your assets are lost, or theft occurs.
2. Buy Gold Stocks in a Gold Mining Company
Another great way to profit from gold is to purchase gold stocks from gold mining companies. These stocks often increase and drop with gold prices, but some mining businesses are lucrative even when gold prices are low.
Changes in gold prices often inflate gold-stock values. A slight increase in the cost of gold can result in considerable gains in the strongest gold stocks, and stockholders often get a far better return on their investment than the owners of bullion bars or coins.
3. Invest in Gold Funds
Investing in gold ETFs and gold mutual funds can give you exposure to gold's long-term reliability while also providing more liquidity and diversification than gold stocks.
It involves owning shares in gold-related resources, such as gold mining companies, but you don't actually own the relevant stocks. You could invest in two types of gold funds: a gold exchange-traded fund (ETF) or a gold mutual fund.
In addition to the liquidity and higher levels of diversification that gold funds offer, they also provide legal protection. Keep in mind that certain funds require management fees.
4. Buy Gold Jewelry
Another way to invest is to acquire gold jewelry that you can wear—or that someone else has worn but has been broken. If you choose to invest in gold by buying jewelry, however, you should keep in mind that it includes a number of risks that investing in gold bars and coins do not.
When purchasing jewelry, you must be cautious because not all secondhand jewelry is supplied by reliable vendors.
Authenticity is important not only to you but also to anybody you attempt to resell the item to. This involves purchasing investment jewelry from a reliable merchant with as much paperwork as possible to verify that the piece is authentic.
Second, depending on the firm that produced the jewelry, you'll have to pay a markup. This might be anything from 20 percent to over three times the value of the gold.
You should also be conscious of the purity of your jewelry or the amount of gold it contains. The purity of gold is measured in karats, and 24 karats imply that the item is made from 100 percent gold. Lower purity reduces the value of the jewelry or the basic value of its parts if melted into pure gold.
5. Investing in Gold Futures
If the other options don’t sound appealing, you can opt for gold futures contracts as a high-risk investment option. This contract is essentially an agreement to acquire or sell a specific quantity of gold at a particular time in the future and is traded on an exchange.
Although brokerages may impose a trading fee, gold futures have higher liquidity than purchasing physical gold and require no management costs.
Bear in mind that futures trading has a high level of risk and is not recommended for new investors. The money you lose on these investments could be greater than your initial capital investment.
6. 401 k and Gold IRAs
If you're investing in gold for your retirement, you can invest in a retirement account backed by precious metals. Suppose your employer is contributing to your retirement. In that case, you can use a 401 k plan to invest in physical gold.
However, if you're investing as an individual, you can invest in a gold IRA. This self-directed account gives you greater control over your investment. Both types of retirement accounts offer tax benefits, but 401 k plans offer higher annual contributions, while IRAs provide more investment options.
Investing in Gold for Beginners
1. Getting Started with Gold IRAs
Investing in a Gold IRA is an excellent way for beginners to dip their toes into the world of gold investing. A Gold IRA, or Individual Retirement Account, allows you to invest in physical gold and other precious metals, providing a tangible asset to diversify your retirement portfolio. To get started, you’ll need to choose a reputable Gold IRA company and set up an account. This process typically involves filling out some paperwork and funding your account with a minimum amount, which varies depending on the company.
Once your account is set up, you can start investing in physical gold. Popular options include gold coins like the American Gold Eagle and the Canadian Gold Maple Leaf, as well as gold bars. You can also diversify further by investing in other precious metals such as silver, platinum, and palladium.
It’s important to note that Gold IRAs come with specific rules and regulations. For instance, your physical gold must be stored in an approved depository, and you’ll need to pay annual fees to maintain your account. Despite these requirements, a Gold IRA can be a powerful tool to protect your wealth from inflation and market volatility, making it a smart choice for those looking to secure their financial future.
2. Understanding Gold Futures and Options
Gold futures and options are advanced investment products that allow you to speculate on the future price of gold. A gold future is a contract that obligates you to buy or sell a specific amount of gold at a predetermined price on a set date. In contrast, a gold option gives you the right, but not the obligation, to buy or sell gold at a specified price.
These financial instruments are traded on commodity exchanges like the Chicago Mercantile Exchange (CME) and are popular among investors looking to hedge against potential losses or capitalize on price movements in the gold market. However, gold futures and options are complex and carry significant risks, making them unsuitable for all investors, especially beginners.
Before diving into gold futures or options, it’s crucial to thoroughly understand these products and the risks involved. Working with a reputable broker and carefully managing your risk exposure can help mitigate some of these risks. However, due to their complexity and potential for significant losses, these investment options are generally recommended for more experienced investors.
Evaluating Your Investment Goals and Risk Tolerance
What Affects Gold Prices?
Several factors can affect the price of gold, including:
- The performance of the US dollar
- World inflation
- Government gold reserves
- The jewelry market
- Interest rate trends
- Demand and supply
It is important to note that past performance does not guarantee future outcomes, particularly in volatile markets like precious metals.
Should You Buy Physical Gold?
Because gold comes in a variety of forms, one might be preferable for your investing strategy than another. Tangible gold coins or bars can be purchased, but they must be kept in a secure location. This could involve paying a fee to a bank, broker, or another third party.
If you’re investing in a gold mining company, the price of the stock, rather than the gold price matters, since it may represent the company’s position in the market and its financial health. Keep in mind that gold stock investments don’t work well as a hedge.
To trade futures, you’ll need trading skills to know when to buy and sell contracts. One of the best ways to enjoy the benefits that gold has to offer as a form of investment is by investing in a 401 k plan or an IRA. This is because you can enjoy significant tax benefits, and it’s also a much easier way to invest in this precious metal.
Every investment has benefits and drawbacks. If you don’t want to hold real gold, buying stock in a gold mining firm can be a better option.
Finally, if you want to use leverage to benefit from increasing gold prices, futures trading might be the way to go, but keep in mind that any leveraged investment comes with a lot of risks.
Whichever investment method you choose, one thing is certain: gold investments are a fantastic way to secure your financial future! According to the World Gold Council, the demand for gold remains strong even during economic hardships, making it a robust investment option.
