Pros and Cons of Investing in Gold

The power of gold is undeniable. It is a compound that can be turned into bars, coins, or jewelry which doesn’t rust nor decay. This makes it a perfect form of currency as it has been used throughout history.

Nowadays, especially with the on-going pandemic, the value of gold is ever increasing and is considered to be a “safe haven” for those looking to invest.

Before venturing into this niche, there are some risks you need to be aware of.

This article will explain about the pros and cons of investing in gold.

Types of Gold Investments

Let’s establish the different types of gold you can invest in. Investors are usually given three choices; to purchase its physical asset or purchase shares through mining stocks and ETF’s.

Keep in mind that their values are generally the same but may differ based on cultural, artistic or market appeal.

1.     Physical Gold

Physical gold are the primary choice for investors. It is a long term investment plan to those who want to avoid dealing with middlemen.

They come in the form of jewelry, coins, or bullion. With direct ownership, investors are allowed easy access to their gold and to do as they please.

2.     Gold Mining Stocks

To invest in gold mining stocks is to purchase a share in a gold mining company. Your return share would be dependent on the company’s performance. Other factors would be based of economic and environmental influences.

3.     Gold ETF’s

Gold Exchange Traded Funds (ETF) is similar to gold mining stocks in a sense that you don’t actually buy the gold.

You as an investor will receive your cash share from the ETF that is backed by gold. ETF’s act like the stock market and are based on a similar trading system. Gold ETF’s are perfect for new investors who look for exposure.

How to Invest in Gold

If you’ve had your fair share of investing experience, then you’d probably want to skip this section.

Different types of gold investments require different methods to invest.

1.     Physical Gold

·       Bullion: Gold bullion is certified by its weight and purity. It is a pure form of gold that is available by the ounce or by the gram.

To ensure the legitimacy of your precious metal, be sure to purchase your bullion through a reputable gold dealer. You do not want to be getting a cheap knock off version of the metal!

 A reputable dealer might also help appraise the gold without the need of a third party. Alternative ways of buying bullion can be through online dealers or local collectors.  

·       Coins: There are many dealers who dabble with gold coins, making it much easier to obtain. Their small sizes also make it more convenient to purchase.

There are two types of gold coins; sovereign coins and numismatic gold coins. Sovereign coins are usually backed with face value whereas numismatic coins are old, rare gold coins that mostly appeal to collectors.

·       Jewelry: Considered to be the least profitable investment among the three, gold jewelry is mostly purchased for artistic purposes.

Avoid over paying for jewelry by finding credible private sellers. The value of these precious metals are based on the purity of its gold so be sure to hunt diligently.

2.     Gold Mining Stocks

Get to know the different players in the mining industry. Investors are encouraged to conduct zealous research to have a better understanding on what stocks to invest in. Investing in the right company can help you profit from gold.

Avoid small miners that are less established and be wary of the mining stocks volatile market. Investing in companies that reap major rewards should be your main priority. Large mining companies have the ability to make a profit during periods of declining gold prices.

3.     Gold ETF’s

ETF’s are much safer investment options opposed to the direct purchase of physical gold. They are done on smaller scales to minimize the risk of mining companies underperforming.

The funds represent a fixed amount of gold which can be purchased or sold like stocks and bonds. This is done through a broker or an IRA account. When investing in gold ETF’s, pay attention to any additional cost and the circumstances that your gold is being kept under.

Another advantage to an ETF is that you don’t have to find a place to store the precious metal.

Understanding the Gold Market

Before delving into the pros and cons, it is important to familiarize yourself with the gold market.

The gold market is a general term that refers to the buying and selling of gold on a global scale. Although this article is tailored for investors in the US, do note that gold prices are the same across all markets.

The greatest factor to influence the gold market is supply and demand. Like with most commodities, supply and demand is very important as it drives the price of gold. This is dependent on economic factors that may push people to buy more gold.

The market is made up of various participants such as producers, refiners and fabricators. Financial institutions such as banks function to offer financing services. To be a participant in the market can help you gain exposure to gold prices. This may be a definitive factor in making your investments as you will have a basic understanding on how gold works.

Advantages of Investing in Gold

Gold became a major investment in 2020. With the pandemic looming over the globe, investors began to buy into gold due to low interest rates set by banks. Here are some advantages as to why gold investments are a big hit.

1.     Inflation Hedge

The precious metal is mostly used as a hedge. Investors look to gold as a source of protection during currency declines.

The value of gold is influenced by inflation. When the purchasing power of currency decreases, the price of gold tends to increase. This is a sort of defense mechanism against the threat of purchasing power.

Investors started to capitalize on the ability gold has as a hedge in 2020. While other equities declined, gold was on the opposite end of the spectrum and was up by 32% in August.

2.     Long Term Value

The value of gold usually flows at a constant rate. Although there are minor dips in its value over time, gold always finds a way to regain its stability. Its high performance in maintaining value is due to its independence from generic economic slumps.

It also helps that gold cannot be destroyed. As history shows, gold has and probably will still be valued years ahead. This makes gold a perfect asset to leave behind for your kids and grandchildren.

3.     High Liquidity

Gold has a large market appeal and there are active buyers and sellers at any given time. As a result, there are many platforms to buy or sell physical gold and this may come in handy.

In situations where you need extra money, this gives you a choice to convert your gold into cash. Gold is always on the demand and you shouldn’t worry about finding a buyer or seller. Refiners, bank, dealers and other individuals could all want a piece of that gold.

4.     Portfolio Diversification

Investing in many different assets can help hedge against the risk of purchasing power. Adding gold to your investment portfolio would not be a bad idea. This will add a sense of balance to your portfolio.

Other bonds and stocks are great till the stock market drops. Gold on the other hand moves in the opposite direction.  As mentioned above, gold can maintain its value during times of economic slumps. Investing in some might just help during slips ups as such. It doesn’t hurt to have a diversified portfolio as well!

5.     Simplicity

Investing in gold is considerably easy. It’s a matter of choosing your preferred method of investment then its smooth sailing from there, usually.

 If you’re opting for physical gold, there are many dealers in the US who’d be willing to deal. Finding a place to store your gold shouldn’t be hard too.  Purchase a simple deposit box or open a safe deposit account and you’re good to go.

To those who plan to invest through stocks, ETF’s are a perfect way for you to gain exposure. It gives you the satisfaction of investing in gold without the need to hold on to its physical asset. A middleman can also help guide you throughout your early tenure as a gold investor.

Disadvantages of Investing in Gold

As with other investments, there are risks that need to be considered when you plan to invest in gold. Here are some cons of investing.

1.     No Constant Cash Flow

Most investors look to invest in assets that can produce passive income. Gold on the other hand does not. Physical gold has 0% cash flow as they are incapable of producing dividend.

Non-income generating assets such as gold, will not give you any long term returns. To put this into perspective, owning an ounce of gold today will not give you more in a decade.

2.     Taxes

The tax imposed on gold transactions can rate very high. The tax rate in the US is currently at a maximum of 28%.

Precious metals like gold and silver are classified as a collectibles under the IRS. Long term ownership of these collectibles will subject you to the 28% tax rate compared to the 15% that applies to most investments.

In other words, any profit made from your gold may be taken into account, literally!

3.     Cost of Storage

Physical gold is not something you’d want to leave lying around the house. Your gold needs to be guarded well and this comes at a price.

Whether it be buying your own safe or opening a safe deposit account, it will cost you money.  Locking your gold away in bank lockers will subject you to its yearly maintenance fee and a heavy duty safe is not cheap.

You should also consider the accessibility of your gold. This might help you decide which method of storage to go for.

4.     Minimal Gains

Although gold is a high performer in maintaining value, it does not give significant returns during market stability. Gold has a tendency of not coinciding with regular market trends especially when it’s soaring.

Due to its incapability of producing dividend, profit from gold is dependent on price appreciation. As it is unlikely for you to lose money on your investments, it will probably not produce a significant return over the long run.

 5.     Speculative Nature

Gold is a highly speculative commodity that is influenced by supply and demand. Investors should be aware that physical gold will not triple in value after a year.

As most investment assets are expected to have a return, gold does not give investors any sort of yield.  This is due to gold’s inability to produce dividend.

On top of that, investors can be subjected to a negative yield when the price of storage and insurance are taken into account.

What to Expect in 2021

With all that out of the way, let’s take a closer look at what to expect from gold investments in 2021.

The price of gold was on a record high last year however, it has since declined upon the bloom of the New Year.

A main factor that played into the New Year is the corona virus situation. With the pandemic still looming at large, many investors were confident in gold to maintain its value. This took an unexpected turn when investors began to divert from the gold market to crypto currencies. A recovery from the pandemic may also see a rise in inflation, further affecting the value of gold.

Speculations of an increase in value are expected to happen later this year if investors do not pull out from the precious metal market. A factor that may push the price of gold up is the USD. With on-going stimulus efforts, the value of dollar may likely fall which will influence a push in gold prices.

Conclusion

Gold is a precious metal that has been used throughout history. There are different types of gold investments such as; physical gold, gold mining stocks and gold ETF.

Before starting your gold investment, be sure to familiarize yourself with the different forms of investments and methods that go with it. It is also essential to understand the gold market and how it works.

As with other types of investments, there are pros and cons to investing in gold. Gold is mainly used as a inflation hedge. It also has long term value, can easily be sold, can help diversify your portfolio and it is fairly simple to invest in.

As for its cons, gold is speculative in nature due to its inability to produce dividend. Gold does not have any cash flow and is usually minimal in returning shares. Taxes and storage methods may also give you a negative yield due to its pricey nature.

Lastly, 2021 has seen a decline in the value of gold. With speculations predicting a rise in the later year, be sure to keep an eye out on the market.

Leave a Reply

Your email address will not be published. Required fields are marked *