Gold is perhaps the single physical asset that people all over the world hold in the highest regard. Gold has been interwoven in the cultures of many people around the world. Gold coins appeared as early as 800 B.C and have continued to be used as major trading commodity or simply to preserve wealth down the centuries.
You might still wonder why invest in gold while there are hundreds of other investable commodities in the market, many of which are perhaps more liquid than gold itself. There are several reasons why investing in gold is a good idea.
Weakness of the Dollar
The U.S. dollar is the most important reserve currency in the world; when the value of the dollar declines against the world’s major currencies as happened between 1998 and 2008, people flock to gold, and consequently, the prices skyrocket. Gold prices nearly tripled between 1998 and 2008, hitting the psychological $1,000 per ounce mark in early 2008. The price action continued unabated between 2008 and 2012 with prices again almost doubling to $1,800-$1,900 per ounce. The devaluation of the dollar was triggered by a variety of factors such as major trade deficits and increased money supply.
Price & Demand Mechanics
Gold is usually priced below its margin cost of production and near its average cost of production. Gold fundamentals are, therefore, reason enough to buy the precious metal. One of the most basic rules of investment is buying assets below their replacement value. Gold is currently trading around its cost of incremental production.
Since the escalation in gold price over the last decade, mining companies have scrambled to produce more. The incremental production costs for many mines is above $1,300. The rising cost is very likely to keep production depressed.
Meanwhile, there is increased demand for gold in the emerging markets such as China and India. India is one of the world’s largest gold consumers, especially due to high demand for gold jewelry which is used extensively in wedding ceremonies. The Chinese use gold bars a lot as a popular mode of saving.
Locally, many investors view gold as an investment class. The SPDR Gold Trust has consequently become one of the largest ETFs (exchange-traded funds) in the U.S., and one of the world’s largest holders of gold bullion.
The interplay between low production and high demand is likely to keep gold prices high.
Value
If you are a value investor or contrarian investor you are probably aware that stocks of mining companies are currently rated as some of the most undervalued in the market today. The overall market is currently trading at historic highs and finding value stocks is not easy.
Many mining stocks have generally been selling off and several are currently selling below their fair value. Value stocks are most likely to hold up well during a market downturn than the average stock. Gold is one of the few commodities whose price is easily driven by politics rather than economic activity. Political uncertainties are likely to drive up the price of the metal.
Portfolio Diversification
For an investor’s portfolio to be properly diversified, it should ideally be at least party invested in gold. 2% or 3% of your portfolio invested in gold at the very least would be okay for a start. Many investors have had their fingers burnt due to lack of enough diversification. The main key to diversification lies in finding instruments that are not closely correlated. Gold has historically had a negative correlation to other financial instruments. For instance, the 70s were great years for gold but really bad for other stocks. In the 80s, the trend reversed as stocks soared while gold lagged. Consumers have been migrating into gold since 2008 which has driven gold prices up. With the U.S. stock market trading at all-time highs, chances of a major market correction are quite high. Expect prices to soar in return.
Hedging Against Inflation
Gold has historically been used as an effective hedge against inflation, because its prices tend to rise when the cost of living rises. The five years when inflation in the U.S. was at its highest are 1946, 1974, 1975, 1979, and 1980. The average real return of gold during those years was 130.4% compared to -12.33% for the Dow Jones Industrial Average.
Ways to Invest In Gold
There are several ways you can take advantage of gold’s time-proven ability to preserve wealth and retain value. You can buy gold coins or bars. These are more liquid than other gold assets and their value is much easier to gauge as well. You can also rollover your IRA to physical gold to protect your retirement fund against inflation.
Gold coins generally sell at higher prices than the spot value of gold mainly due to their design and manufacturing costs. Their upside, however, is that they are more liquid than gold bars and can easily be bought and sold. Gold bars sell near gold spot price since they are easier to produce and store. They are available in various sizes such as 1-once, 400-ounces, and 1kg.
If you do not like the idea of buying physical gold, you can invest in exchange-traded funds (ETFs). Make sure the ETF you invest in holds physical gold as the primary investment.
FAQs
Investing in gold can often be a prudent choice for those seeking to diversify their portfolios, hedge against inflation, and protect their assets during economic uncertainty. Gold's enduring value and its role as a safe haven asset make it a compelling investment, particularly in volatile or unpredictable markets.
Why is gold such a good investment? ›
Gold is valuable due to its rarity, durability, and historical significance as a medium of exchange and store of value. It tends to hold its value during economic turbulence, and investors appreciate its potential for a safe haven. It is also used in jewelry and electronics, so there are some real-world uses of gold.
What is the downside of buying gold? ›
Con: It doesn't give you passive income or steady returns
Unlike some investments that yield passive income (e.g., rental properties, some stocks and bonds), physical gold doesn't provide passive income, dividends or interest. You will only earn once you sell your gold.
Are 1 oz gold bars a good investment? ›
The short answer is yes, 1-ounce gold bars could still be a good investment for the right investors, even with inflation falling. That's because while gold tends to shine during periods of high inflation, its appeal as an investment vehicle extends well beyond its role in that capacity.
Should beginners invest in gold? ›
The bottom line. Gold is an impressive asset for beginner investors to consider. But, there are times to, and not to, buy the precious metal. In particular, beginners should consider buying gold when they need to diversify their portfolios, when inflation rates are high and when other market risks are present.
What will gold be worth in 5 years? ›
Gold Price Forecast Summary
| Year | Forecast Range |
|---|
| 2024 | $2,000 – $2,399.62 oz |
| 2025 | $2,300 – $3,000/oz |
| 2026-2030 | $1,600 – $3,000 General sentiment: Upbeat trend |
Jun 25, 2024
You should aim to own around 5-20% of gold in your overall portfolio, with the exact percentage varying based on your age and investor profile. Most experts recommend keeping your gold investment within the range of 5% to 20% to diversify your portfolio and hedge against inflation.
Is it better to keep gold or cash? ›
Gold offers a hedge against inflation
Gold is a unique safe haven asset because it acts as an inflation hedge. This is due to gold's historical tendency to climb in value when the dollar falls. So, the precious metal may help you maintain the value in your portfolio during periods of high inflation.
Can you lose investing in gold? ›
However, gold is typically a poor investment option when the economy is strong. It will often lose money during these periods as investors sell gold to put their money in the stock market and other growth assets. In the long run, gold has a significantly lower average annual return than stocks.
Why gold is not a safe investment? ›
Price volatility: The price of gold can be volatile, and it may fluctuate significantly over short periods. This can make it difficult to predict its value and can make it a risky investment.
"One-ounce gold bars boast very strong retail demand and liquidity, making them highly tradable assets. Their affordability also enables gradual accumulation, appealing to a much larger and more diverse investor base," says Schectman. These gold bars can also sit in a sweet spot in terms of pricing.
Is it better to own gold bars or coins? ›
First-Time Investors
Additionally, if you have a larger budget and secure storage options, gold bars offer a wide range of sizes to suit your investment needs. On the other hand, if you are interested in the potential collectability and numismatic value of gold, gold coins may be a better choice.
Are gold bars hard to sell? ›
The weight of your gold bar directly impacts its price and ease of sale. Smaller bars like 1-ounce options offer affordability and easier trade, while larger bars such as the 400-ounce ones are more often held by large investors and institutions due to their substantial value and lower premium over spot price.
How much gold can I buy with $1000? ›
$1,000 in gold bullion, for example, may get you about 0.5 oz of gold bullion. But you can get around four 1/10 oz American Gold Eagle coins for $1,000.
What is the best form of gold to buy? ›
Ideal for Long-Term Investment
If you consider to hold physical gold for a long period of time without any intention to sell part of your investment overtime, gold bars will be the best option for you. They will cost you less per gram compared to gold coins. This is because of their lower premium, as explained below.
When you buy gold, do you actually get gold? ›
Jewelry, especially antique pieces, can provide another avenue for buying gold. But like gold coins, you'll probably be paying extra for the amount of gold you're actually getting—a premium that could be anywhere from 20% to 300%, depending on the manufacturer.
Why gold makes a good form of money? ›
Gold as currency
Gold makes for the perfect material to store value. The rarity of gold is at an ideal level, meaning that it is scarce enough to be a precious metal, but common enough that it can be used as a currency, unlike a material such as platinum, which is significantly rarer.
Will gold ever lose its value? ›
Gold has been used as a form of money for centuries and its value does not depreciate over time. The value of gold tends to increase over time due to its limited supply. There is a finite amount of gold reserves in the world, so as the demand increases, the price of gold will also rise.
Is gold a better investment than stocks? ›
stocks: Which is the better investment? Stocks have generally performed better than gold over the years, but there can be exceptions. Looking back 20 years, for example, gold has outperformed the S&P 500.
What are the benefits of gold? ›
Gold is believed to have anti-inflammatory properties, improve energy levels, improve skin health, improve mental health, and improve circulation. Whether you believe in the health benefits of gold jewellery or not, there is no denying that it is a beautiful and valuable metal that has been treasured for centuries.
The U.S. dollar is the most important reserve currency in the world; when the value of the dollar declines against the world’s major currencies as happened between 1998 and 2008, people flock to gold, and consequently, the prices skyrocket. Gold prices nearly tripled between 1998 and 2008, hitting the psychological $1,000 per ounce mark in early 2008. The price action continued unabated between 2008 and 2012 with prices again almost doubling to $1,800-$1,900 per ounce. The devaluation of the dollar was triggered by a variety of factors such as major trade deficits and increased money supply.
For an investor’s portfolio to be properly diversified, it should ideally be at least party invested in gold. 2% or 3% of your portfolio invested in gold at the very least would be okay for a start. Many investors have had their fingers burnt due to lack of enough diversification. The main key to diversification lies in finding instruments that are not closely correlated. Gold has historically had a negative correlation to other financial instruments. For instance, the 70s were great years for gold but really bad for other stocks. In the 80s, the trend reversed as stocks soared while gold lagged. Consumers have been migrating into gold since 2008 which has driven gold prices up. With the U.S. stock market trading at all-time highs, chances of a major market correction are quite high. Expect prices to soar in return.
