Gold has always held a level of fascination for investors. Nowadays, you can buy it in any number of forms, from coins and bullion to jewelry and exchange-traded funds, to name just a few. But is gold a good investment? For many investors, the answer is yes. Whether used as a tool for diversification by traditional investors or by speculators to make a quick buck, it seems like there will always be a demand for the bright, shiny metal.
- Why Is Gold Valuable?
- Advantages and Disadvantages of Investing in Gold
- How To Invest in Gold
- Is Gold a Good Investment?
Why Is Gold Valuable?
Gold is valuable in part due to the laws of supply and demand. When a lot of people want something that has a limited supply, the price goes up. Although gold is constantly being mined and processed every single day, the entire amount of gold that has ever been extracted from the Earth can still fit into a cube about 69 feet, or 21 meters, on each side. That’s a pretty big cube, but when you think about it in terms of all the gold in existence above ground on Earth for all of history, it’s not much at all.
Why is there demand for gold? Well, gold has important uses in electronics and manufacturing due to the fact that it’s an excellent conductor and it doesn’t corrode. Gold is also permanently shiny and can be easily formed into a number of different shapes. And perhaps most importantly of all — people like shiny things. Gold has long been viewed as a status symbol and an indicator of wealth.
All of these factors play a role in determining the price of gold. Other factors are also involved, such as the price of the U.S. dollar, inflation expectations and geopolitical events, as gold is a “hard asset” that is viewed as a safe haven in the event of rising prices or global uncertainty.
As far as pricing goes, gold-based exchange-traded funds can be bought and sold at any time stock markets are open, and they track the current market price for gold bullion. Gold coins are priced at whatever agreement can be reached between dealers and customers. The same goes for gold jewelry.
Advantages and Disadvantages of Investing in Gold
As with any investment, gold carries both advantages and disadvantages. The key is to understand the difference and see how it might or might not fit into your overall investment strategy. Here’s a list of commonly cited pros and cons of investing in gold.
- Store of value: Unlike the currencies of major nations, which are only backed by the guarantee of their governments, gold has always had an intrinsic value. Whereas a country can go bankrupt or otherwise fail to support its currency, gold has always been in demand.
- Inflation hedge: The price of gold typically rises in tandem with inflation, as rising prices tend to devalue currencies.
- Chance for speculative gains: Gold prices are notoriously volatile, meaning fleet-footed traders can often snag a quick profit by moving in and out of the market.
- Non-correlated asset: Gold typically does not move in tandem with other common investments, such as the U.S. stock market. Thus, it has diversification value.
- No cash flow: Gold, at least in the form of bullion, coins or jewelry, doesn’t pay out any cash dividends, meaning the only value you’ll get out of your investment is if the price appreciates.
- Certain forms are illiquid: It can be much harder to sell gold coins or gold jewelry than, say, a stock.
- Potentially large markups: If you have gold coins, jewelry or bullion, you’ll need to find a dealer or other buyer if you want to sell your investment. Since there are limited outlets for these types of products, dealers often charge high markups on gold transactions.
- Expensive to store: Unless you have access to a private vault, you’ll need to store gold coins and bullion somewhere secure. This type of storage can be expensive and can eat into your profits.
- Uncertain long-term appreciation potential: The price of gold moves due to a number of market forces, from inflation and fear to supply and demand. But there is no long-term uptrend supporting the price of gold. Unlike the stock market, which generally tracks the performance of the economy and can be expected to have a long-term bias to the upside, the future price movement of gold is always a speculation.
Also Consider: 6 Precious Metal Investments Better Than Gold
How To Invest in Gold
Gold can be purchased in many different forms. Some options are more liquid than others, which can make them better for investment purposes, but each has its pros and cons.
The price of gold jewelry can rise over time, in line with the spot price of gold, but dealers typically won’t add any “jewelry premium” to the piece itself. There are exceptions to every rule, and high-end collectible pieces can indeed command premiums, but there are easier ways to invest in gold and to track its price more accurately than by purchasing common jewelry items. Jewelry can be hard to sell, as there is no exchange market for it. This means you’ll have to find a jeweler yourself and try to negotiate a fair price, which will always be less than the current market value of the gold inside. Your best bet to get a good deal as a buyer might be to find an estate sale.
Gold ETFs are one of the most liquid ways to trade gold, and they’re particularly appropriate for speculators, or those looking for an easy way to hedge. You can buy and sell a gold ETF at any time the stock markets are open for trading, and their price will generally be in line with the current price of gold, less the costs of running the fund itself. With a gold ETF, you don’t have to worry about negotiating prices, paying storage fees or being stuck with an illiquid investment.
Gold companies trade on the public stock exchanges, but investing in gold stocks is completely different than investing directly in gold itself. When you buy the stock of a gold company, you’re not just tracking the price of gold — you’re buying a piece of the entire operation. The profitability of the company is not determined just by the price of gold, but also by the efficiency with which the company can extract and process gold, in addition to all the other factors that affect the profitability of companies. Although stock shares are liquid, the return you’ll earn on a gold company investment might only be loosely correlated with the price of gold.
Gold coins are valued based on their gold content, but truly collectible coins also carry an investment premium. This premium comes from the combination of the scarcity of a coin and its condition. Truly collectible coins can rise in value much faster than simple gold bullion. But you can’t buy or sell a gold coin on an exchange, so you’ll need to find a dealer to make any transactions. This ensures that you’ll pay more to buy the coin than you would receive if you sold it. If you don’t have a personal safe at home, you’ll also need a place to store your gold coins, the cost of which can subtract from your overall return.
Gold bullion is most commonly symbolized by the gold Krugerrand, which is a 1-ounce gold coin issued by South Africa. Gold bullion doesn’t usually have any additional investment premium over the price of the gold, as might be the case with certain collectible gold coins. Rather, bullion coins are primarily valued for their gold content.
That being said, some versions of gold bullion coins do cost more than others, due to factors such as distribution costs and demand. The return you’ll get on your gold bullion should match the price of gold closely, less any dealer commissions or fees.
Gold Mutual Funds
Gold mutual funds come in many forms, from those that invest in gold-mining companies to those that are purely exposed to the price of the metal. They can be a good option if you want to entrust your gold investment to a professional money manager. The downside is you might never know exactly what your manager is buying in the fund, and you might have to pay fees and commissions along the way to own a mutual fund. In addition, you can only sell a mutual fund once per day, after the market closes.
A gold future is a contract between a buyer and seller that is usually completed on the New York Mercantile Exchange. The buyer promises to purchase a certain amount of gold at a certain price from the seller on a specific date in the future, hence the name. Futures are popular with investors because they are leveraged, meaning you only have to put up a small amount of the total contract price at the time of purchase. Of course, leverage works both ways, meaning that a large drop in the price of gold before you complete the contract means you can lose lots of money. Futures are therefore appropriate only for aggressive speculators who can afford to lose the money they invest in these volatile contracts.
Also Learn: How To Invest in Oil
Is Gold a Good Investment?
Whether or not gold is a good investment depends on who you ask. Gold doesn’t have a great long-term track record against some other investments, such as the S&P 500 stock index, for example. In some forms, it’s not very liquid, meaning it can be hard to sell rapidly at a fair price. Gold itself also doesn’t pay out any cash flow, which can make it a non-starter for retirees and those living off a fixed income.
On the upside, gold perennially has been used as a hedge against inflation and global upheaval, as it tends to hold its value when other investments drop. This makes good a good diversification tool for balanced portfolios. Because the price of gold is often volatile, it can also be a good option for speculators.
But for many investors, the true allure of gold is as a timeless and beautiful gift or personal treasure. If you’re looking for that type of investment, you might be satisfied for the rest of your life with your gold.
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John Csiszar has worked for over 18 years in the financial services industry as a Certified Financial Planner and a Registered Investment Adviser. He has experience working both for a global wirehouse and his own RIA firm.