Is Gold Still a Smart Investment?
For many millennia, human civilization has used gold as a symbol of wealth. In fact, archeologists continue to discover treasure chests containing gold from as early as 4000 BC. [1]
If you wish to invest in gold, here’s a detailed guide on ways to invest in gold and whether gold remains a smart investment today.
A Brief History of Gold Investments
The precious metal’s history in human civilizations goes back several thousand years. Yet it wasn’t until 560 B.C. that merchants who needed a standardized form of money started using stamped gold coins as currency. [2]
The advent of gold as money fueled a series of gold rushes, with most metal and paper currencies adopting a gold standard.
The U.S. dollar (among other major currencies) is no longer backed by physical gold. However, the precious metal is still highly valued and has a significant impact on the modern global economy.
Balance sheets of major central banks and financial organizations, such as the International Monetary Fund, indicate that these organizations still hold over 20% of the world’s supply of above-ground gold. [3]
Why Invest in Gold?
Gold is often a smart, lower-risk investment product. Here are several ways you can benefit from it:
Gold as a Storage of Wealth
Gold has maintained its fair value for centuries, making it a safe haven investment for many.
Gold jewelry and physical coins have remained valuable assets even during volatile market shifts. You can use them to preserve your wealth in this uncertain economic environment.
For example, suppose that you bought $100 worth of gold in the 1970s. The value of gold has increased drastically over time, providing more return than the original $100 investment. Yet, the 100-dollar note hasn’t increased in value, and the inflation costs mean you may not purchase as much as you could have in the 70s.
Gold as an Ideal Hedge to the Dollar
Gold is considered to be a safe investment because its value doesn’t fluctuate significantly. Thus, it’s used to hedge against inflation. Although its value is relatively stable, gold’s supply and demand determine the price of the commodity.
Inflation occurs when currency devalues over time, which makes goods cost more than they used to. Consumers have less purchasing power with each dollar they spend on goods or services as time goes on.
Gold prices typically rise alongside increasing inflation rates, with investors buying gold to avoid losing their money to the depreciating dollar.
Gold Investments to Diversify Your Portfolio
A well-balanced portfolio provides an excellent hedge against financial risks, especially during economic downturns. Investments in gold offer a perfect way to diversify your portfolio, placing your money in a high-value commodity.
Gold’s price movements tend to be inversely related to U.S. stock markets. This makes it an excellent hedge against inflationary or deflationary periods in which most other investments may suffer greatly or even become worthless entirely.
As gold can hold its value over long periods, investing in it is an ideal way to cushion your risk exposure.
Ways to Invest in Gold
Investors have multiple pathways they can use to invest in gold, and each has its pros and cons. Here’s are several gold investment options you can try:
Gold Bars or Bullions
Gold-bar trading is the most traditional way of investing in gold. These can be bought on the spot market and sold quickly, making them more liquid than other forms of investments.
Gold bars are also the most expensive form of investment in gold because they contain less weight than coins and bullion products. [4]
Gold Coins
Gold coins are another popular form of investment. Most countries have mints that make the coins for collectors and investors. Bullion coins are legal tender, meaning they can be used as a form of payment. Numismatic gold coins typically appreciate over time. Gold coins are a good investment because they are tangible and easy to store and sell.
Shares in Gold Mining Companies
Shares in gold mining companies can be a volatile investment but are less expensive than purchasing gold bars or coins.
The value of the gold stocks is directly proportional to the rise and fall of gold prices on the spot market. Even when gold prices tumble, well-managed gold mining companies can still provide positive returns and dividends. Take time to analyze the different gold firms before investing.
Gold ETFs
ETFs are a fantastic way to invest in gold without buying physical gold. They are exchanged-traded funds usually backed by physical gold stored in vaults. The ETFs typically match the movement of gold prices in the market and provide a highly liquid environment to trade the precious metal.
Gold Derivatives — Futures and Options
Futures and options are derivatives of spot gold prices, which means you can benefit from the appreciation of spot prices without buying physical gold at today’s prices.
Futures contracts allow an investor to purchase gold at a specific value and date in the future. Options allow selling and buying gold shares or stocks at a particular future date and price.
The contracts feed off the existing price movements in the commodities markets, providing investors with decent exposure to gold without actually owning the asset.
Is Investing in Gold Still Worth It?
Gold has withstood adverse economic turmoils and changes in civilizations. It provides an amazing opportunity to hedge against the current inflationary pressure and a potential recession.
You have multiple options to invest in gold, with some being more liquid than others. If you’re looking for a quick return on your investment, it is best to buy gold bars or futures contracts because they have the lowest premiums over spot prices.
References:
[3] https://www.investopedia.com/articles/basics/08/invest-in-gold.asp#toc-different-ways-of-owning-gold
[4] https://www.fool.com/investing/stock-market/market-sectors/materials/gold-stocks/gold/