Is buying gold a good investment? Traders, savers, and investors favor gold for many reasons, including the impressive attributes that make it a counterpoint to traditional securities like bonds and equities. The world over considers gold a good store of value even though it does not give any cash flows. Many argue that gold can be an excellent vehicle to hedge against inflation but is it the only reason to invest in gold? However, is gold a good investment? Even if so, should you invest in gold now?
Investing in gold needs beginners to understand that there are some pros and cons in investing in gold. Many things come into play, including the strategy, timing, and pricing at any given point. Here are 5 pros and cons you should consider before you begin your venture into gold investment.
5 Pros of gold investment
1. Gold has a long history of increasing in value
Since it was discovered, gold has been a commodity people coveted and used to store wealth. Even though most central banks have recently stopped using gold-backed currencies, it is still immensely valuable, especially during economic downturns. Unlike coins and banknotes, gold has remained stable through the centuries. Investors can bet on gold to pass wealth down to future generations.
2. Reliable hedge during times of crisis
Historically, gold has performed well as a reliable hedge against inflation and other crises. It has had price gains even when living costs continue to rise in 2022. When major world economies suffer high inflation, their currencies drop in value, and their treasury yields become unfavorable. This phenomenon drives investors to focus on gold because cash and treasury yields become less effective as safe-haven resources. Over the last 50 years, gold prices have continually oared, and the stock indices plunged whenever there was a period of high inflation.
3. Gold helps you diversify your portfolio
It is wise to have more than just common stock in a portfolio. If examined over more than a decade, gold helps to reduce losses during an economic downturn. It has excellent power to improve performance on risk-adjusted returns in a portfolio. Gold futures or ETFs give you a liquid asset while maintaining a low correlation with other asset classes during an economic boom and depression. With the financial investment recommendation that good portfolios should have less correlated assets, gold is an excellent pick because it is negatively correlated to stocks.
4. Gold demand keeps on increasing
As emerging economies continue to thrive, the new wealth has increased the consumer demand for gold. There are also countries where gold items are part of the culture. For example, India is the largest consumer of gold globally, and that is because owning gold jewelry is very widespread. India's total household ownership of gold surpasses the top 5 central banks. Giving gold jewelry and household decoration is a common culture in Asia. China and India are the top bullion consumers in the world. The rapidly growing middle class is already a good investment clue for dummies planning to trade gold and are unsure about demand.
Demand is expected to grow because the cash-liquid middle class has a higher appetite for gold jewelry, rings, and related accessories. In the last decade, institutional investors and fund managers have flocked to gold and precious metals as investment channels due to the popularity of online trading. They are a liquid investment channel to allocate funds and benefit from small price changes.
5. Global government debt is at its highest
The total global government debt has continued to rise every year. The total debt at the end of 2020 was $284 trillion, which is expected to rise during 2023 as many economies have no choice but to continue borrowing. The large deficits experienced by major global economies may also imply that another financial crisis could be brewing. Should I invest in gold now? Yes! Shrewd investors should take this as a sign to have gold as a safe-haven asset that will protect their investment portfolio.
5 Cons of gold investment
Like all investments, it is never smooth sailing. Investment in gold also has several significant risks and disadvantages. These common issues have regularly discouraged people from having substantial gold in their portfolios.
1. Declines after a remarkable rise
Gold prices usually soar when the global economy goes into a mild or severe recession. That was visible in 2011 when prices hit an average of $1,888 an ounce. However, the prices had declined by mid-2020. This shows that the price performed well but was still a drop from where they were a decade earlier.
A more apparent trend was in the late 70s when gold surged due to economic instability. After making new highs, the spot price spent the next two decades on a gradual decline. Depending on the strategy you may adopt, a buy-and-hold investor would be discouraged from waiting a decade to have prices that are similar or less to what they bought it at. During the 2020 pandemic, investors were unsure how the economy would perform, and many, in return, could not quite tell the way forward regarding the gold trade. In the case of the 70s, many investors also needed to decide whether to buy the gold immediately or wait for the price to decline a bit before buying. The sharp declines after sustained rallying discourage many investors who do not have a high-risk appetite.
2. Gold coins are not a perfect hedge against inflation
Since gold coins or gold bars do not produce dividends or any interest returns, gold is not a 'perfect hedge' for long-term inflation. Investing in gold is also a risk, and people prefer some compensation for that risk. It is okay to have a strategic allocation for gold, but over the long term, many people believe that gold does not generate that level of returns that may justify simply hoarding it in a vault. On the other hand, even though it gives some cover during high inflation, other securities, such as TIPS and natural resource stocks, can provide better hedging effects.
3. Gold does not produce or replicate
If examined from a non-price perspective, an ounce of gold owned will remain an ounce of gold as time goes by. In contrast, investors may prefer company stocks because those underlying companies produce other goods. For example, a tech stock will likely continue producing some consumer electronics that will generate new income streams for its investors. If conditions are right, a company will likely have a growing asset portfolio that can give it more earning potential. On the upside, a profitable company will likely give investors more dividends. It may still re-invest profits in other ventures with the potential for more revenue streams. It is normal to find investors recovering their investments and earning more from dividends than their initial investment.
4. Gold has a limited variety of uses.
The most common source of gold demand is jewelry. However, as a proportion of the total demand for gold, jewelry has slowly lost its share, while most of the new demand is for financial speculation. It is difficult to tell whether new uses will come up in the future, apart from ornamental, industrial, and medical use. With physical gold having no income streams, people mostly count on short-term demand changes to identify potential trading opportunities.
5. Lack of standard valuation criteria for gold
Valuing a stock is a straightforward process in contrast to gold. Finance experts can value any asset based on future cash flows. There are accurate financial ratios and other figures search as price-to-earnings and price-to-book value that can help investors know whether they are getting a good deal before trading company stock. With gold, things get a little murky. Gold is purely based on people's impressions of how valuable it is. It gets even trickier when you cannot tell the growth of earnings because you cannot make an earnings forecast for gold.
The fundamentals of company stock can also give investors a clue as to how much upside or downside potential there is when rating a stock. Gold, on the other hand, has its value changing due to supply and demand. At worst, the supply and demand for gold are often driven by panic instead of direct fundamentals affecting it. Valuation challenges, therefore, make investing in gold bullion or gold coins a problematic issue for beginners.
Table of summary
Gold has a long history of increasing in value
Declines after a remarkable rise
Reliable hedge during times of crisis
Gold coins are not a perfect hedge against inflation
Gold helps you diversify your portfolio
Gold does not produce or replicate
Global government debt is at its highest
Lack of standard valuation criteria for gold
Gold demand keeps on increasing
Gold has a limited variety of uses
4 Ways to invest in gold
Now that you have a general outlook on the pros and cons of gold, the next point to ponder is how to invest in gold. Therefore, understanding the usual channels you can own or trade in gold is vital.
The oldest way to invest in physical gold is through bullion. People purchase gold bullion through online dealers like JM Bullion or APMEX. People also buy from face-to-face referrals, local dealers, collectors, and pawn shops. Due to the rudimentary way of owning gold in this way, investors need to find a willing seller and still ensure that the quantity required is available and that they can get a fair deal. You can always cross-check with spot prices to keep you from getting ripped off. It also requires a safe way to transport and store it, considering it is in the form of gold bars, gold coins, or jewelry.
2. Consider ETFs that own gold
To skip the complexities of owning physical gold and the cost of storing it safely, you can consider buying into ETFs that deal in gold. Buy gold ETFs from top indices across the globe. Some popular gold ETFs include SPDR Gold Trust and iShares Gold Trust. The ETFs that deal in gold provides you with more liquidity and convenience because investors are only issued shares of actual gold held by the trust. They are a good way to replicate the performance of gold on the market while only charging investors a small expense ratio.
3. Gold futures
Gold futures are a convenient and quick way to speculate on gold prices. Investors can simply speculate whether the prices will rise or fall. COMEX Gold Futures (GC) is the top-recognized benchmark for the gold futures contract. People can get tips, analyses, and track daily changes when published online. Regular traders even make orders in the comfort of their homes. Click here to trade commodities.
4. Trade gold as a currency
XAUUSD is among the pairs that forex brokers offer today. Include gold pairs in your forex trading if you already know how it works. As a free tip, trading gold as a currency pair helps you kill two birds with one stone, as you can apply the same strategies as you would with currencies and stocks. Live charts also help you monitor price changes in real-time. A beginner can open a demo account and test different strategies to make money with gold price movement using a guide.
So, Should you buy gold?
The advantages of investing in gold far outweigh the disadvantages involved. The selected investment vehicle depends on the preferred time frame (short-term or long-term) and preferred reasons to buy the gold. Owners who want a fall-back plan during a war or political crisis would prefer physical gold because it is not tied to the country’s financial system. If you prefer making short-term speculative trades, gold ETFs and gold futures will give you liquid solutions that take advantage of price volatility.
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How to start investing in gold?
You can open an account with ATFX and start trading gold and silver today. Your journey to a new investment opportunity can begin with just a few clicks. With ATFX, you can enjoy low spreads, quick order execution, and 24-7 Live support for all your trading needs. If you are still a newbie to the trading scene, you can simply register a demo account with ATFX and practice without depositing real money. Test all your strategies and familiarize yourself with the market with valuable training guides available for free. A rewarding future is waiting for you once you want to upgrade to a live account.