When you’re investing your money, it’s important to diversify your portfolio. Gold as an investment is one of the oldest and most well-known stores of value. It has been used as a currency since 550 BC and was collected as a prized possession as early as 4000 BC. Major world governments have used it to back their respective paper currencies throughout history. So what makes gold so special, and should you be investing in gold in 2021?
What makes gold as an investment so special ?
Gold has been a highly sought after metal since it’s discovery and its popularity and status has only grown throughout the years. It is one of the 4 primary “precious metals” that we give this distinction to today.
So what makes gold so special?
Gold does not corrode
Gold is one of only a few metals in existence that does not corrode. While we know today that this is due to its chemical composition, this was seen as a symbol of immortality and power in the early years of humanity. Being able to create objects that would last centuries was a new concept to those living in 4000 BC. Gold was believed to be unique in this sense.
In modern times, this information has allowed us to use gold as a lasting store of wealth. There is no chance of losing your gold to the elements or having it corrode and rust away into nothing. It’s unique properties, combined with its high desirability, has allowed governments to safely use gold as a way to back their country’s paper money.
Gold is aesthetically pleasing
We know that humans have been drawn to gold for over 6,000 years. The early Egyptians fashioned jewelry out of gold which was worn as a symbol of status and wealth. Gold was also used to accentuate religious artifacts and increase their appeal and significance. The Romans similarly used gold to create settings for their precious gemstones.
The color itself is appealing and unique. There are no other metals that can be extracted from the earth in a raw form that entirely mimic the color of gold.
Today, we have many forms of gold that can be used in jewelry. They are all created using some amount of gold mixed with other metals. We also attempt to mimic the color of gold by creating jewelry out of less expensive metals. We also do the same by plating them with gold on the outside.
Gold is just rare enough
Another reason gold is so unique is that it exists in limited quantities that straddle a fine line between two things. Being too rare and not rare enough.
Societies of the past would create coins for use as currency but rare enough that not everyone could obtain it and create their own. If an enormous surplus of gold was found, the overall value of the metal would decline. This happened because it would then be deemed more common. If everyone were able to dig up gold in their backyard, the perceived value would not be as high.
Should I invest in gold as an investment ?
Now that we know what makes gold so uniquely valuable, we can examine its effectiveness as an investment vehicle.
Gold vs stocks
The stock market is typically what people think of when you mention investing. This is one of the main competitors to gold as a store of wealth that will appreciate with time. To determine whether or not you should invest in gold, it’s important to see how it’s performed on both short and longer-term timescales. You do this and compare to activity on the stock market.
The Down Jones Industrial (DJI), which tracks 30 of the largest publicly traded companies on the New York Stock Exchange (NYSE), has increased its value. This increase has been by 153% over the past 15 years. In contrast, during this period, gold saw its value increase by 330%.
Based solely on this, you may think it would be a good idea to dump all of your money into gold.
If you take a look at the past 30 years, however, the DJI saw a value increase of over 990%, while gold remains at a 330% increase in the same time period. With this information, stocks look much more attractive as a way to put your money to work for you, but that doesn’t mean gold should be ignored by any means.
This trend continues the further back you go and stocks have outpaced gold in value increase over the last 100 years. Note: the outpacing however does not diminish the value and importance of the gold investment.
Gold in times of hardship
A unique feature of gold as an investment vehicle is that the price of gold rises when economic uncertainty is at its highest. Typically this corresponds with a decline in the stock market. In times of hardship, such as a recession, the value of gold skyrockets while the price of stocks plummets.
During the great depression, gold rose from $20 per ounce to $35 an ounce in just 5 years. The stock market cratered and left many people who had only invested in stocks, completely broke. Those who also held gold at the time were much better off. They were more likely to be able to weather the storm.
In 1971, when President Nixon detached the U.S. dollar from the gold standard, the price of gold tripled in a single day. It went from $42 to $120 per ounce.
The fear of uncertainty and the unknown effects on the stock market and US dollar made gold the safest choice. Particularly when we are talking about storage of one’s wealth.
In 2011, gold reached a record high of over $1,800 per ounce. This was shown to have nearly doubled its price from just 3 years earlier. Uncertainty over the U.S. debt ceiling due to the 2008 recession. Consider poor employment data, and the European debt crisis sent gold to its (then) all-time high.
Fast forward to today, and gold is at it’s highest price per ounce at roughly $1,950. At the beginning of the Covid crisis, gold was valued closer to $1,500. The economic strain and uncertainty it brought in early 2020 has caused gold’s value to increase. That increase was by almost 25% in the past year.
Diversity is key
Any investor worth their fee will tell you that diversity is key to a strong investment strategy. Holding only stocks, or only gold is seldom the way to go. Investors typically recommend holding around 10% of your wealth in gold, as a hedge against the stock market. When your stocks go down, the value of your gold will typically increase. Gold also acts as a hedge against inflation, as its value is not tied to a single currency or government.
How do I invest in gold as an investment ?
The key is to take action and get started. Since we now know that gold should be a part of everyone’s investment portfolio, what are the best ways to invest in gold? Interestingly, you do not have to buy physical gold to be invested in gold.
How to invest in physical gold
Investing in physical gold requires you to personally obtain, transport, store, and secure your gold against theft. In this scenario, you are purchasing one of several types of gold that is determined to be of investment quality. Investment quality gold is simply gold that has been certified to be 99.5% pure gold. For physical gold investment, you have several options.
Gold bullion is investment quality gold that is stored in the form of bars or ingots. This is the gold you see in heist movies when the bank or casino’s vault is breached. While the bars kept by large stockpiles (and the kind you see in movies) are around 400 ounces, gold bars and ingots are also commonly sold in 1 and 10-ounce weights. With gold close to $2,000 an ounce in January 2021, most investors would not be able to afford a 400-ounce bar of gold, hence the smaller bars and ingots that are made available for purchase.
Gold coins are another great way to invest in gold. These coins typically weigh around 2 to 3 ounces and are made of pure gold. Gold coin prices do not always strictly align with their per-ounce pricing, and some of the coins are considered collector’s items. These can usually be sold for around 5-10% higher than just their weight in gold depending on condition and rarity. When buying gold coins it is important to remember that the bulk of the value does lie mostly in the quantity of gold, and gold plated coins will not be as valuable as they may appear.
Gold has been incorporated into jewelry since the ancient Egyptians. You can invest in gold jewelry and have a piece of gold that you can wear and use in your day to day life. When buying gold jewelry, it’s extremely important to buy from reputable sellers as the market is full of scams promising to get you a good deal on your gold jewelry. These pieces of jewelry have similar properties to gold coins and are sometimes worth more than their weight in gold. Documentation and authenticity are key when purchasing and reselling gold jewelry.
How to invest in virtual gold as an investment ?
If purchasing, transporting, storing, and securing your physical gold seems like a hassle, you’re in luck! There are several ways to buy gold that leave you without the physical asset to keep track of and protect.
An allocated gold account allows you to instantly purchase and sell gold bullion without needing to physically hold it. Providers of this service, such as BullionVault and GoldMoney, sell rights to the gold they hold in their vaults.
The gold is audited and accounted for. You receive documentation of ownership that is backed by physical gold at one of their locations.
This is one of the easiest ways to buy and trade physical gold without going through the hassles of actually owning physical gold.
It is extremely important to verify the service you are using for this. Ensure they’re a recognized and trusted provider. Since you will not be able to verify this gold exists by touching and inspecting it, there is much more room for scams in this field.
Gold mining company investments
A slightly riskier way to invest in gold is to invest in the companies that are actively looking and mining for more gold.
It is riskier because you are buying shares in a mining company. In these companies their stock price is not directly correlated to the price of gold. You are investing in the entire company which includes operations, management, equipment, and expedition costs. Because of this, gold mining companies have the opportunity to both underperform and overperform gold’s pricing.
When investing in gold mining companies, it is recommended that you invest in several well-reputed companies. This decreases risk by spreading your investment out over 2-3 companies. This increases the odds that you are a part of a company that hits the motherload.
Gold ETFs and gold mutual funds
Keep your investments together by using the stock market to invest in gold. You can do so through investments in gold Electronic Trade Funds (ETFs) or Gold Mutual Funds. Gold ETFs typically function similarly to an allocated account. You are buying shares in a company that holds gold for you. Based on your purchase, you are assigned a specific portion of their gold and it is held for you.
A Gold mutual fund is an investment fund that holds assets related to gold. This means it can incorporate gold mining companies, mining tool production companies, physical gold holdings, and futures contracts. These funds typically aim to outperform the price of gold per ounce and are not passively managed like ETFs.
Investing in silver
While we are primarily focused on gold investment in this article, it’s a good time to mention that silver is extremely similar to gold when considering using it as a store of wealth. All of the options outlined above are available to you when investing in silver. The main differentiator is the price and accessibility for all. Silver is much less expensive than gold and can be an easy way to step into the precious metals investment market. Silver is currently around $27 per ounce, which is 72 times less expensive than an ounce of gold.
How to invest in gold as a beginner
It’s easy to get overwhelmed and not know where to start with so many options. You may think investing in gold takes time, research, and patience. While these steps should be applied to any investment, the numerous options available to you mean that investing in gold is easier today than it has ever been.
We recommend choosing the option that is most comfortable for you. If you are already invested in the stock market and would like to keep your investments neatly together… You can invest in a Gold ETF.
If you just want to try your hand at trading gold, there are few options easier than a reliable allocated account.
If you don’t trust someone else to hold your gold for you and prefer to keep it physically… bullion, coins and jewelry from reputable dealers are should be considered.
Overall, the most important factor in investing your money in gold is to choose an investment strategy you’re comfortable with.
Should I invest in gold as an investment ?
The question we came to answer.
Yes, you should. Gold is a stable investment vehicle that acts as a hedge against inflation and recession. Most investors cap the amount of gold they hold at 10% of their overall portfolio for peace of mind. A diverse portfolio is necessary to combat unforeseen challenges in the economy, and gold is one of the only wealth stores that increase in value during recessions or uncertain economic times.
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