Gold has been a popular investment for hundreds of years, but most investors don’t see the point in buying it today. There are fewer and fewer places that will buy gold from you.
Sure, it may be a good idea to own some gold. But it is not a good idea to go out and buy gold for the sake of owning gold.
In today’s article, we will discuss whether or not you should buy gold.
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Gold: An Investment or an Insurance?
Gold is a popular investment.
You can buy gold coins, gold bullion, or gold bars. They all function similarly: they are worth a certain amount of money and they don’t do anything.
The main difference is that one form of gold is worth more than another form of gold.
If you buy a 1-ounce gold coin, it will be worth more than if you buy a 10-ounce gold bar. If you buy a 100-ounce gold bar, it will be worth more than if you buy a 1-ounce gold coin.
Gold has no cash flow. It does not pay interest or dividends. It does not generate any income for you. It serves one purpose: to protect your wealth from the effect of inflation.
So, is gold a good investment? Yes and no. Let’s talk about why.
Your wealth is your ability to generate income now and in the future.
Wealth is not just money in the bank. It is your assets plus your ability to generate income from those assets.
So, if your assets double in value over a period of time, then your wealth doubles.
If your assets lose half their value, then you have lost half your wealth.
Inflation is the effect of too much money chasing too few goods and services. It causes prices to rise over time. As prices rise, you need to pay more for the same goods or services.
If you buy gold instead of something else, then you are protecting your purchasing power against inflation. If a loaf of bread costs $5 today, but $10 a year from now, you can still buy the loaf of bread with your gold bar.
If you had saved $5000 in a bank account, it would be worth $5000 less a year from now.
Gold has no cash flow. It does not pay interest or dividends. It does not generate any income for you. It serves one purpose: to protect your wealth from the effect of inflation.
As such, Gold can act as both an investment and insurance.
The Rise and Fall of Gold
Gold’s price has had a wild ride over the past century.
In 1922, the U.S. dollar was worth 1/20 of an ounce of gold. Today, it is worth 1/1300 of an ounce of gold. That’s a depreciation of 97%!
Gold has been used as money for over 5000 years.
It is a commodity that has generally performed well during times of crisis.
So, why has it been falling throughout most of the 20th century? The answer lies in the history of central banking and modern money.
The Federal Reserve System was created in 1913 to protect the government from high inflation.
Prior to the Fed, Americans could redeem their paper money for gold or silver coins. This practice was ended in 1933 by Franklin Roosevelt. Between 1933 and 1971, the United States had a gold standard.
That meant that the dollar’s value was tied to gold. The dollar was worth 1/35 of an ounce of gold until 1971. Since 1971, the dollar has been a fiat currency.
Fiat currency is a currency whose value comes from government decree rather than intrinsic value.
Why would the government stop protecting the value of its currency?
The government wanted to be able to print money to pay for the Vietnam War and other government spending. Printing money creates inflation.
When people expect prices to rise, they buy more now before prices go up. This creates a boom. Inflation also makes it difficult for businesses to plan for the future, so they cut back on new investments.
Pros and Cons of Investing in Gold
Gold has fascinated people for thousands of years.
Even with the rise of other investments, gold remains popular. Many people like gold for its portability, beauty, and historical importance. Others see gold as a hedge against inflation and economic uncertainty.
Pros
- Gold is portable. You can purchase a small amount of gold and carry it with you in a pocket or purse without trouble.
- Gold has investment value. The price of gold has risen sharply over the years. A decade ago, you could buy an ounce of gold for $300. Today, that same ounce would cost about $1,200.
- It is beautiful. Gold jewelry is treasured as much for its appearance as its investment value.
- It has historical importance. Gold bars and coins have been used as money and to make jewelry for thousands of years.
- It can be converted into cash easily and quickly. You can sell gold
Cons
- You need to pay capital gains tax if you sell it later, so you will have to pay tax twice.
- If you don’t keep it in the form of gold, e.g. in a bank account, it’s not easy to sell it in small amounts.
- It’s difficult to wait for returns from gold as it takes a long time to sell it.
- If the price of gold goes up, the amount of gold you own may not be enough to cover the cost of buying another item with the gold.
How to Invest in Gold?
There are several ways to invest in gold.
You can buy gold directly, that is, you can buy bars or bullion coins. But you will pay a premium over the spot price of gold because of the costs of storage, insurance and shipping.
You can buy gold mining stocks, but again you will pay a premium over the spot price of gold because of the costs of mining, refining and distribution.
You can buy mutual funds that invest in gold mining stocks and bullion. These funds will charge a management fee for their service plus an additional charge for buying and selling the gold. You also have to pay a brokerage fee if you buy these funds through a stock brokerage firm.
You can buy gold certificates and silver certificates issued by banks and brokerage firms. For example, you can buy certificates issued by the U.S. Treasury in denominations of $50, $100, $500, $1000, $5000 and $10,000. You will pay a premium for these certificates because of their low denomination and the costs of storing and insuring them. But these are convenient if you want to hold small amounts of gold without paying for storage.
You can also buy certificates that represent shares in a fund or mutual fund that invests in gold. Again, you will pay a premium over the value of the gold represented by the certificates.
You can buy gold futures contracts. These are contracts that allow you to buy or sell a certain amount of gold at a specified price on a certain date in the future. You can also buy futures that allow you to buy or sell a specified number of ounces of silver.
Gold ETFs (Exchange Traded Funds). This is an exchange-traded fund (ETF) that is like a mutual fund but trades on an exchange like a stock. It holds physical bullion or gold futures contracts. The expense ratio is very low, usually less than 0.20%. You can buy and sell the fund on the stock exchange during market hours.
3 Tips to Invest in Gold
Set Up a Regular Investment Plan
One way to invest in gold is to set up a regular investment plan you can afford. You can set aside just a few hundred dollars each month or a few thousand dollars each year.
Once you have decided how much you can invest, make it an automatic payment from your checking account to your gold fund.
This way, you will never miss the money and you will be investing in gold without the hassle of deciding what to buy or when to sell.
Invest in Physical Gold
Another way to invest in gold is to buy physical gold coins or bullion.
The price of gold varies every day, so you cannot just look at the spot price of gold in your newspaper to know what to pay for the gold you want.
You will need to do some research so you are comparing the prices of the same kind and quality of gold. The cheapest way to buy gold is to purchase gold coins from a reputable coin dealer.
Invest in Exchange-Traded Funds
The easiest way to invest in gold is through exchange-traded funds (ETFs). An ETF is a type of mutual fund that tracks an index, such as the price of gold.
What this means is that if the price of gold goes up, your investment in the ETF will go up. If the price of gold falls, your investment falls. The price of an ETF is quoted just like a individual stock. One share of an ETF is quoted as the number of dollars you need to pay for one share.
An ETF is easy to buy and sell because you can buy and sell shares through your stockbroker. The only difference between buying and selling an ETF and buying and selling a stock is that you will be paying a small fee to buy and sell an ETF.
Conclusion
If you are considering the possibility of investing in gold, there are many things to consider as mentioned above. The first is that gold is a volatile investment and can go up or down in value. It’s important to learn as much as possible about gold before you invest any money.
The final decision on what kind of gold investment is right for you will depend on how much money you want to invest, how aggressive you are in your investment strategy, and how much time you want to devote to investing.
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