TABLE OF CONTENT
GOLD AS AN INVESTMENT ——————————————————-5
FACTORS TO CONSIDER BEFORE INVESTING IN GOLD————–5
HOW TO INVEST IN GOLD ——————————————————-7
GOLD PRICE ————————————————————————–11
Jewellery and Industrial demand————————————————–12
Gold Jewellery Recycling———————————————————–12
War, Invasion and National Emergency—————————————–13
QUESTIONS TO BE ANSWERED BEFORE YOU BUY YOUR
FIRSTOUNCE OF GOLD———————————————————–13
PROS AND CONS ON INVESTING IN GOLD ——————————-20
IMPORTANCE OF GOLD IN MODERN ECONOMY ———————–24
This book entails the several pros and cons associated with investing in Gold.
If you have ever dreamt of investing in gold but getting confused about the risks and benefits associated with it, then this a guide is for you.
After several types of research and vetting, I have made myself familiar with some of the advantages and disadvantages involved in a gold investment. Also, I acquired a lot of experience and insight and got to know all the standards and requirements.
Since this is a beginner’s guide, no matter how ignorant you are about investing in gold, we will guide you towards the factors to consider while investing in gold, how to invest in gold the right way, gold price and factors that affect gold price, pros and cons of investing in gold, etc.
This course will guide you step by step on how to invest in gold.
Gold is a shiny, comparatively dense, yellow metal. As an element, gold is quite resistant to corrosion (by oxygen, but also many other chemicals). “Gold is a chemical element with an atomic number of 79 and the symbol Au. Gold is a soft, dense, shiny metal and the most flexible and ductile metal known.” In ancient times the value of gold had already been discovered. People took gold to make jewelry and currency. It is a symbol of wealth, beauty, and heritage carrying cultures and memories. However, besides these, gold also makes significant contributions to a wide range of technologies due to its physical features as corrosion resistance and highly malleable and ductile, gold is also applied in space exploration, medicine, and nanoparticle technology. Moreover, it is also used as the linking wire at the core of an iPhone.
GOLD AS AN INVESTMENT
Gold is considered by many, to be the best investment you can make to protect yourself against stock market declines and inflation. In fact, history shows that the accomplishment of gold goes up in times of high inflation. However, the cost of gold also has its lows and highs, and you could just as quickly lose money investing in gold as with any other investment. Investors buy gold as a way of diversifying risk, mainly through the use of futures contracts and derivatives. The gold market is subject to volatility and speculation as are other markets. Gold has the most efficient haven and hedging properties across some countries compared to other precious metals used for investment.
FACTORS TO CONSIDER BEFORE INVESTING IN GOLD:
(i) Forms of buying gold: Any investor has to be aware of the different types of buying gold. Jewellery, the most traditional and the dominant way of buying gold in India and Bank coins, gold exchange trades, bullion bars, etc. are other forms of investment.
(ii) Current income: Gold in any shape does not give any current income. The only exception is the dividend option in the gold ETFs. If held physically, there is the single outflow of cash for the maintenance of lockers.
(iii) Capital appreciation: gold is a solid bet compared to shares that are highly erratic. The reason for gold investment will be to use it when the products are falling and when the inflation is very high.
(iv) Risk: Gold does not carry much risk as we hardly see deflation in the real sense.
(v) Liquidity: compared to all other investments, gold scores the highest regarding liquidity, At any time of the day and any day gold can be converted to cash. Banks would give you a jewelry loan (remember though that many banks do not offer loans on coins, including their own), and so would your friendly neighborhood pawn shop
(vi) Tax treatment: Gold suffers capital gains tax as per the IT Act. So it is better to ask your jeweler for the bill. Gold does not have any other tax importance.
(vii) Convenience: Gold scores very high here. But with the per gram price rising, the smallest single investment is becoming higher.
HOW TO INVEST IN GOLD
Whenever you buy gold, the first rule of thumb is dollar cost averaging — putting a fixed amount of money towards gold every month regardless of the price. For the average investor, this strategy spreads the risk out over time and lessens the downside.
Most money managers advocate anywhere from 2%-11% in gold. More bullish managers recommend an allocation as high as 25%.
Gold is protection, currency debasement, insurance against inflation, and global uncertainty. Here are the ways you can invest.
1. Gold Bullion
Buy physical gold at various prices: jewelry, coins, and bars. Some of the most common gold coins are American Buffalo, American Eagle and St. Gauden’s. You can store gold in bank safety deposit boxes or your home. You can also buy and sell gold at your local jewelers. When you buy bullion or gold coins, avoid significant premiums. You want to buy gold as close to the spot price as possible, or a 10% premium at most. The higher the premium, the higher the gold price will have to rise for you to profit.
Coins typically come from the national mint, where they are made and sold at a 4% mark up — the retailer’s margin is 1% to 3%.
You must have the reason you want to buy gold bullion to avoid getting ripped off. If you ‘re going to own gold as a long-term investment, then buy gold as close to the spot price as possible.
Where investors also tend to go astray is by buying semi-numismatic or numismatic coins, also known as rare coins, which come with huge premiums that seldom recoup their value.
A good rule of thumb is to abandon rare coin buying to rare coin dealers. If a broker tries to sell you a lie with the coin like it’s from the “old world and there are only a few thousand in existence” professionals advise to go elsewhere.
“Don’t confuse investing in gold with products being sold as gold investments,” cautions Nadal. “You want a particular thing that tracks the price of gold as close to a dollar as possible.”
2. Gold ETFs
Gold exchange-traded funds are a favorite way to have gold exposure in your portfolio without the hassle of storing the physical metal. First, you can invest in one of three physically backed ETFs, which track gold’s spot price.
For each portion of these ETFs you buy, you own the equivalent 1/10 an ounce of gold. If investor demand exceeds available shares, then the issuer must buy more physical gold to convert it into stock. Conversely, if there are no buyers when investors sell, then gold is redeemed, and the company must then sell the gold equivalent.
Gold is an instrument for investors and for traders looking for gold exposure or as a way to hedge other gold positions. The result can be rough, violent price action.
Expense ratios can range from 0.26% to 0.51%, and your value erodes the longer you hold the shares. The fund must sell gold, for example, occasionally to pay for expenses which decreases the amount of gold allocated to each share.
Because you own shares and not the physical metal, precious metal ETFs may be sold short, so two people can hold the same “gold” — the original owner and the investor who is borrowing the shares. Although baskets of stocks are allocated to specific gold bars, which can be found in the ETF’s prospectus, an investor must share ownership.
Profits made on investments in physically backed ETFs are also taxed like collectibles, at around 28% — an investor gets taxed as if he owned bullion when in reality he just holds paper.
It is possible to redeem shares for physical gold, but that preparation is conducted with brokers and is typically more difficult. Investors have to redeem in huge lots, like 600,000 shares, not viable for the retail investor.
ETFs are also very controversial. Many complain that investors can’t know if their gold exists. Also, if the bank responsible for keeping safe the gold fails, the investor, aka ETF, becomes a creditor.
3. Gold ETNs
If you want more risk, try exchange-traded notes, debt instruments that track an index. You give a bank money for an allotted period and, upon maturity, the bank pays you a return based on the accomplishment of what the ETN is based on, in this case, the gold futures market. Some of the most popular ones are UBS Bloomberg CMCI Gold ETN (UBG), DB Gold Short ETN ( DGZ) DB Gold Double Short ETN ( DZZ), and DB Gold Double Long ETN ( DGP).
ETNs are like playing the futures market without buying contracts on the Comex. ETNs varies, and an investor can trade them short or long, but there is no principal protection. You can lose all your money.
4. Gold Miner Stocks
An unsafe way to invest in gold is through gold-mining stocks. Mining stocks can have as much as a 3-to-1 leverage to gold’s spot price to the upside and downside.
Gold miners are risky because they trade with the broader equity market. Some tips to consider when picking gold stocks are to find companies with steady production and reserve growth. Make sure they have proper management and inventory supported by either buying smaller-cap companies or by maintaining consistent production.
Many investors make the mistake of buying small gold miners that are in the exploration phase with no cash flow. Picking among these stocks is like buying a lottery ticket, very few companies strike gold and become profitable. Even fewer become takeover targets.
With high gold prices, gold companies can make more for every ounce of gold they produce, but their net profits depend on their cash costs; how much it costs them to create an ounce of gold. Those factors vary from company to company and are subject to currency issues, geopolitical factors, and energy costs.
Another factor to observe when picking gold stocks is how quickly the firm will benefit from higher prices.
There is always time to buy gold; you just have to know your ABCs before you start.
5. Gold streaming companies
One hybrid way to invest in gold is to purchase shares of gold streaming companies. These firms don’t mine gold, but they provide financing to mining firms in exchange for a share of their gold production.
The benefit of streaming companies is that they have exposure to gold prices but also get a stream of income from their financing arrangements.
There are many ways to invest in gold and which one is best for you depends on your particular goals. By knowing the differences between these attractive gold investments, you’ll be able to invest smarter and find the right way for your situation.
Gold has been used throughout history as money and has been a relative standard for currency equivalents specific to economic countries or regions, until recent times. Many European nations implemented gold standards in the latter part of the 19th century until these were temporarily suspended in the financial crises involving World War I.
Since 1919 the most common benchmark for the price of gold has been the London gold fixing, a twice-daily telephone meeting of representatives from several bullion-trading firms of the London bullion market. Also, gold is traded continuously throughout the world based on the intra-day spot price, realized from over-the-counter gold-trading markets across the globe (code “XAU”).
Like most commodities, the price of gold is driven by supply and demand, including speculative demand. However, unlike most other products, saving and disposal play more significant roles in affecting its cost than its consumption. Some of the gold ever mined still exists in accessible forms, such as bullion and mass-produced jewelry, with little value over its excellent weight — so it is nearly as liquid as bullion, and can come back onto the gold market.
Central banks and International Monetary Fund play an essential role in the gold price. Although central banks do not announce gold purchases in advance, some, such as Russia, have expressed interest in growing their gold reserves again as of late 2005. In early 2007, China, which only holds 1.3% of its reserves in gold, announced that it was looking for ways to enhance the returns on its official reserves. Some people hope that this signals that China might put into new position more of its holdings into gold, in line with other central banks. It is accepted that the price of gold is closely related to interest rates. As interest rates rise, the general tendency is for the gold price, which has no interest, to drop, and vice versa. As a result of this, the gold price can be correlated in a close manner to central banks via their monetary policy decisions on interest rates. The amount of gold can be influenced by some macroeconomic variables. Such variables include the price of oil, the use of quantitative easing, currency exchange rate movements and returns on equity markets.
JEWELLERY AND INDUSTRIAL DEMAND
Jewellery consistently accounts for more than two-thirds of annual gold demand. Industrial, dental and medical uses account for around 12% of gold demand. Gold has high thermal and electrical conductivity properties, along with a high resistance to corrosion and bacterial colonization. Jewellery and industrial demand have fluctuated over the past few years due to the steady expansion in emerging markets of middle classes aspiring to Western lifestyles, offset by the financial crisis.
GOLD JEWELLERY RECYCLING
In recent years the recycling of used jewelry has become a multibillion-dollar industry. The term “Cash for Gold” refers to offers of cash for selling old, broken, or mismatched gold jewelry to local and online gold buyers. There are many websites that offer these services.
However, there are many companies that have been caught taking advantage of their customers, paying a fraction of what the gold or silver is worth, leading to distrust in many businesses.
WAR, INVASION AND NATIONAL EMERGENCY
When dollars were fully convertible into gold via the gold standard, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat more substantial and less divisible gold coins. If people feared their bank would fail, a bank run might result.
QUESTIONS TO BE ANSWERED BEFORE YOU BUY YOUR FIRST OUNCE OF GOLD
Q. What kind of gold should I buy?
A. We probably get that question more than any other – pretty much on a daily basis. However, the answer is not as straightforward as you might think. What you buy depends upon your goals. We normally answer the “What should I buy?” question with one of our own: “Why are you interested in buying gold?” If your goal is to hedge financial uncertainty and capitalize on price movement, then contemporary bullion coins will serve your purposes. Those concerned with the possibility of capital controls and a gold seizure, or call-in, often include old pre-1934 gold coins in the mix. Both categories carry average premiums over their gold melt value, enjoy substantial liquidity internationally and track the gold price.
Q. When should I buy?
A. The short answer is ‘When you need it.’ First and foremost, Gold is wealth insurance. You cannot approach it the way you approach stock or real estate investments. Accurate timing is not the real problem. First, one of the questions you should ask yourself is whether or not you think you have to own gold. If you answer that question in the affirmative, there is no point in delaying your actual purchase or waiting for a more favorable price which may or may not appears. Cost averaging can be a good strategy. History tells us that crashes, panics, mania, and collapses are as familiar to financial account as thunderstorms to quiet summer afternoons. The real goal is to diversify so that your overall wealth is not affected by economic dangers and uncertainties like the kind generated by the 2009 financial crisis.
Q. Why not buy gold when the necessity has arisen?
A. Over the past few years, as concern about economic and financial breakdown spread, there were periods of gold coin bottlenecks and actual shortages. In 2008-2009 at the height of the financial crisis, demand was so high that the national efforts could not keep up with it. The movement of historic gold coins from Europe was also not sufficient to meet accelerating demand both there and in the United States. Premiums shot-up on all gold and silver coins and a scramble developed for what was available. There is an adage saying that the best time to buy gold is when everything is quiet. I would underline that sentiment. For 2017, the U.S. Mint reported gold bullion coin volumes at the highest level since 2014 – and the fifth best year on record.
Q. Can you give us a profile of the typical gold investor?
A. Gold owners are a group of people I have come to know very well in my 40+ years of the business. Contrary to less than flattering picture sometimes painted by the mainstream press, the people we have helped become gold owners are among those we rely upon most in our daily lives – our physicians and dentists, teachers and nurses , plumbers, carpenters and building contractors, attorneys, business owners, engineers and university professors (to name a few.) In other words, gold ownership is merely a Main Street endeavor. A recent Gallup poll found that 35% of American investors rated gold the best investment “regardless of gender, age, income or party ID.” In that survey, investors rated gold higher than bonds, stocks, real estate and bank savings.
Q. What about high net worth investors?
A. Traditionally, wealthy, aristocratic European and Asian families have kept a substantial percentage of their assets in gold as a protective factor. The long-term economic picture for the United States has changed enormously over the past several years. As a result, that same philosophy has taken hold in the United States mainly among those interested in preserving their wealth both for themselves and for their families from one generation to the next. In past years, we have helped a good many family trusts diversify with gold coins and bullion at the advice of their portfolio managers. Few people know that the America is the third largest consumer market for gold after India and China.
Q. You frequently mention gold as insurance. What does that mean?
A. Gold’s baseline, outstanding quality is its role as the only primary asset that is not someone else’s liability. That separates gold from the majority of capital assets which in fact do rely on another’s ability to pay, like bonds and bank savings, or the performance of the organization, or some other delimiting factor, as is the case with stocks. “No matter what happens in this nation, with the dollar, with the stock and bond markets, the gold owner will find a friend in the yellow metal — something to rely upon when the chips are down. In gold, investors will find a vehicle to protect their wealth. Gold is bedrock.”
Q. What percentage of my properties should I invest in gold?
A. If you were to choose a cross-section of advisors who suggest gold as part of an investment portfolio, the level of diversification would range between 6% and 31%. We recommend between 10% and 30%. How high you go within that range depends on how concerned you are about the current economic, financial and political situation.
Q. How can the average investor differentiate between the excellent gold firms and the bad?
A. First, and most important: Check the Better Business Bureau’s profile on a company before you do business with it. Check not only it’s rating but the number of complaints lodged against it and how those claims were handled. A consistent record of charges can be a warning sign even if the company has managed to keep an A+ rating. This is an uncomplicated and straightforward step every first-time investor should take, but it is incredible how many people ignore it. Second, choose a gold firm that has a solid track record. Eleven years in business is good; fifteen years or more is even better. Third, choose a company with a commitment to keeping you informed, i.e., one that is interested in answering your questions now and keeping you informed in the future. If a salesperson gives you short shrift or hits you with a massive sales pitch take it as a warning.
Q. Can you describe briefly what you believe to be the most prominent mistake investors make when starting out as gold owners?
A. The most significant trap investors fall into is buying a gold investment that bears little or no relationship to his or her objectives. Take safe-haven investors for instance, that group makes up 90% of our clientele, and probably a good 75% of the current physical gold market. Most often the safe-haven investor only wants to add gold coins to his or her portfolio mix, but too usually this same investor ends up instead with a leveraged (financed) gold position, or a handful of exotic rare coins, or a place in an ETF that amounts to little more than a wager on the gold price. These have little to do with safe-haven investment, and most investors would be well-served to avoid them.
Q. What about the high profile gold companies that advertise on cable television and talk radio?
A. The same vetting rules outlined earlier apply. Check them out. Frequently investors make the mistake of believing that the gold firm that sponsors their favorite political commentator is also the best place to perform their gold purchases. National media campaigns are expensive, and those costs are usually covered in the prices paid by investors for their gold and silver coins. In some instances, that markup can be twice the underlying metal value. Take care that you are not paying too much for your gold and that you are buying the gold items best suited to meeting your goals.
Q. How has the very-low-to-negative-rate environment affected the gold market?
A. Positively. Most of the high demand globally since the beginning of 2016, has been driven by the low-to-negative-rate environment. At a time when fixed-yield investments pay little to nothing, gold and silver at least provide some upside potential. Also, these metals protect against the downside risks entailed by the low to non-existent rates of return. Those two very persuasive facts have translated to high institutional and fund demand at the ETFs as well as demand among individual investors for physical coins and bullion. Amid-2016 Bankrate survey of investors is telling in this regard. One in six chose gold as the best place to park money they would not need for the next ten years, the same number that picked stocks.
Q. How do you view gold stocks?
A. Many of our buyers own gold stocks, and we believe they have a place in the portfolio. Nevertheless, it should be emphasized that gold stocks are not a substitute for real gold ownership, that is, in its physical form as coins and bars. Instead, stocks should be viewed as an addition to the portfolio after one has genuinely diversified with gold coins and bullion. Gold stocks can act opposite the intent of the investor, as some justifiably disgruntled mine company shareholders learned in the recent past when their shares failed to perform as the price rose. There is no ambiguity involved in actual ownership of bullion and gold coins. When gold rises, they rise with it.
Q. What about options contracts and gold futures?
A. Futures and options contracts are considered one of the most speculative areas in the investment marketplace. The investor’s exposure to the market is leveraged, and the moves both up and down are greatly exaggerated. Something like 9 out of 10 investors who enter the futures/options market come away losers. For someone who looks to hedge his/her portfolio against economic and financial risk, this is a poor substitute for owning the metal itself.
Q. What about ETFs?
A. Since, for one reason or another, it is difficult to take delivery from any of the ETFs, they are viewed as a price bet and not actual ownership of the metal. Many gold investors want possession of their gold because they are purchasing as a hedge against an economic, financial or political disaster. When disaster strikes, it does not do you much good to have your gold stored in some remote facility by a third party. For this reason, over the past couple of years, the trend even with hedge fund operators has been away from the ETFs.
Q. What is the best approach for the safe-haven investor?
A. If you want to protect yourself against inflation, deflation, stock market weakness and potential currency problems — in other words, if you ‘re going to hedge financial uncertainties, there is only one portfolio item that will serve you in all seasons and under most circumstances – gold coins and bullion. Make sure to do your homework on the firm with which you choose to do business and make sure that the gold ownership vehicle you select genuinely reflects your goals and aspirations.
THE PROS AND CONS OF INVESTING IN GOLD
Below, based on information from dealers and the World Gold Council, we describe the significant ways to own gold and list their pros and cons about the factors mentioned above.
One point to bear in mind is that, as gold is traded in United States dollars, there is foreign exchange risk for investors buying gold in another currency, such as sterling. This adverse change comes into play whenever the dollar starts to slide, said Stephan Mueller, who manages the Julius Baer Physical Gold fund.
BARS AND COINS
All precious metal products trade at a premium or discount to the market price of the precious metal concerned, Mr. Baird said. Following high demand for gold over the past year or two, need for coins had pushed coin premiums into upper levels, he added.
“By contrast, there has been no shortage of physical gold in London, and premiums have barely changed for several years.
“On a weight-for-weight basis, premiums on bars are lower than for coins, and this makes bars the more attractive proposition for investors. As a rule, bigger bars have smaller premiums (reflecting manufacturing and refining costs) than smaller bars, although larger bars provide less flexibility in liquidating part of an investment.”
Bullion coins are legal tender in the country of issue. The market value of bullion coins is determined by the amount of their excellent gold content, plus a premium that varies between dealers. Don’t confuse commemorative or numismatic coins with bullion coins, whose value depends on their rarity, design and finish rather than just their excellent gold content.
Small gold bars can be bought in a variety of sizes and weights up to 1.5kg. Like bullion coins, they consist of a minimum 99.5pc gold. Bars are prone to carry less of a premium than coins
Pros: Perfect correlation to the market price of gold (but remember the currency risk). Coins and bars are accessible to the private investor, and you can invest in relatively small amounts of gold (a 2.5g bar costs about £67, for example). When you have physical gold yourself there is no “counterparty risk” – your investment does not rely on a person keeping their promises or remaining in business.
Cons: Production costs can add 15pc to the price of the gold itself. You may need to visit a dealer and arrange secure transport, and you will need somewhere safe to store your gold, as well as insurance, all of which may involve extra cost. Costs of transaction for some coins can be high, while liquidating just part of your holding may be impossible – you can’t sell half a bar or coin
Buying gold jewelry for investment purposes is common in the Middle East and much of Asia. Jewellery used primarily for investment purposes is usually reasonably plain and of high caratage (21-24 karat).
Pros: better correlation to gold price (although not as close as with bars and coins); easy to sell and buy.
Cons: Jewellery may be linked more to fashion trends than to investment value. If jewelry has to be liquidated the investor loses the craftsmanship value, as the ultimate value is based purely on the amount of the gold. In some nations, it may be difficult to verify the gold content. Costs of insurance and safe storage.
ALLOCATED GOLD ACCOUNT
Another way to own bars or coins. A vault holds gold on your behalf, with specific bars belonging to you – your bars or coins are numbered and identified by hallmark, weight, and fineness. Effectively like keeping your gold in a safety deposit box.
Pros: Perfect correlation; suitable for relatively large quantities of gold; professional levels of security and insurance; low counterparty risk as the gold belongs to you even if the company that owns the vault goes bust
Cons: insurance costs and storage.
UNALLOCATED GOLD ACCOUNT
As with allocated accounts, you have a set quantity of gold stored in a custodian’s vault. The difference is that you don’t hold specific bars – it is like the difference between having cash in a bank’s safety deposit box and having money in a bank account. The custodian can lend “your” gold, so you do not usually pay for storage or insurance. You can request for physical delivery if you wish.
Pros: Perfect correlation, lower costs, flexibility.
Cons: Counterparty risk – if the custodian goes bust you won’t be able to reclaim your gold and will merely be a creditor of the company.
These are securities traded on the stock market whose cost closely reflects physical gold. You buy and then sell them just as you would a share.
Pros: Excellent correlation to gold price. One of the simplest way to achieve non-geared exposure to gold. Low counterparty risk because the fund is a keeper for the assets, which legally belong to the investors. They can hedge against currency risk, although not all do so. Durable, as you can buy and sell in units of a single share. Low “spreads” between selling and buying prices.
Cons: The manager will deduct charges, typically 0.4pc to 0.5pc a year, from the value of the fund. You’ll have to pay broker’s commission every time you trade.
OTHER UNIT AND INVESTMENT TRUSTS
Some funds specialize in gold-related assets; the most famous is BlackRock’s Gold & General. They have broad discretion over the underlying assets they buy, correlation to the gold price is variable.
Pros: Low counterparty risk as the asset manager is a keeper for the assets; easy to buy (via a fund supermarket, for example). No insurance costs or storage.
Cons: most funds have mixed-asset and hence poor gold price tracking; returns reflect the skill of the manager as much as movements in the gold price. You pay an annual management charge and sometimes an initial cost too.
THE RELEVANCE OF GOLD IN THE MODERN ECONOMY
Because gold no longer backs the U.S. dollar (or other worldwide currencies for that matter) why is it still essential today? The simple answer is that while gold is no longer in the forefront of everyday transactions, it is always essential to the global economy. To validate this point, it is important to look as far as the reserve balance sheets of central banks and other financial organizations, such as the International Monetary Fund. Presently, these agencies are responsible for holding approximately one-fifth of the world’s supply of above-ground gold. Also, several central banks have focused their efforts on adding to their existing gold reserves.
Gold Preserves Wealth
The reasons for gold’s relevance in the modern economy centers on the fact that it has successfully preserved wealth throughout thousands of generations. The same, however, cannot be said about paper-denominated currencies. To put things into perspective, consider the following example.
Gold as a Hedge Against a Rising Inflation and Declining U.S. Dollar
The thought that gold preserves wealth is even more critical in an economic environment where investors are faced with rising inflation and a declining U.S. dollar (due to rising commodity prices). Historically, gold has served as a hedge against both of these scenarios. Gold typically appreciates with rising inflation. When investors are aware that their money is losing value, they will commence positioning their investments in a hard property that has traditionally maintained its value. The 1970s present a prime example of rising gold prices in the midst of growing inflation.
The reason gold benefits from a declining United State dollar is because gold is priced in USD globally. There are several reasons for this relationship. First, investors that are looking at purchasing gold (like central banks) must sell their U.S. dollars to make this transaction. This drives the U.S. dollar lower as global investors seek to diversify out of the dollar. The second reason has to do with the fact that a weakening dollar makes gold cheaper for investors who hold other currencies. This results in higher demand from investors who own currencies that have appreciated relative to the U.S. dollar.
Gold as a Safe Haven
Whether it is the tensions in the Middle East, Africa or elsewhere, it is becoming increasingly evident that political and economic uncertainty is another reality of our modern industrial environment. For this reason, investors normally look at gold as a haven during times of political and economic change. Why is this? Well, history is full of collapsing empires, political coups, and the collapse of currencies. During such times, investors that held onto gold were able to successfully protect their wealth and, in some cases, even use gold to evade all of the turmoil. As a result of this, whenever there are news events that hint at some uncertainty, investors will often buy gold as a haven.
Gold as a Diversifying Investment
The sum of all the above reasons to own gold is that gold is a diversifying investment. Regardless of whether you are worried about inflation, a declining U.S. dollar, or even protecting your wealth, it is clear that gold has historically served as an investment that can add a diversifying component to your portfolio. At the end of the day, if your focus is solely diversification, gold is not correlated to stocks, bonds, and real estate.
When investing in gold, one should be aware of some pros and cons associated with it
Gold has endured centuries as a mark of wealth, and the many importance of gold begins with its simplicity. It is relatively scarce, indestructible, and cannot be produced. It is a refreshing alternative to the complex investment products in the headlines today.
The gold price is still considerably lower than its previous high, back in 2011/12. This provides the opportunity to buy significantly more gold now, than five years ago, for the same amount of money.
There’s a limited supply of gold in the world that creates exponential price rises when demand increases. Production cannot just rise to meet increased demand, so the supply/demand dynamic naturally drive prices higher. This also reduces the risk of devaluation, as lower prices then quickly attract more, new order, which will once again fuel price increases.
Provides Portfolio Balance
One of the most popular importance of gold is that it’s deemed to be a safe product, which investors have always turned to, in times of economic downturn. Its performance is apolitical and therefore independent of any one country’s policy agenda. It’s consequently perceived to be a hedge for anyone at risk of losses on their property value, ISA, bonds, stock portfolio, and pension.
History tells us that the world as related to finances moves in cycles. In a period when one property class performs well, another may yield losses. It is far too risky and impossible to try to call these exact cycles, by placing all your hard-earned money into one investment area. Instead, any IFA (Independent Financial Advisor) will recommend spreading the risk across the various asset classes, shifting the percentage of each holding according to the current economic conditions.
This way, an investor usually owns a variety of assets, so any falls in one area will hopefully be offset with a different asset, making good returns over the mid-term and maintaining balance. Owning physical gold always reduces the overall volatility of a portfolio. In these current, uncertain times, experts believe up to 30% of holdings should be in gold, with perhaps 6-15% in better economic times.
No Counterparty Risk
In its physical form, the holder has no risk to any counterparty. This is particularly important in today’s new financial world, where money is no longer even safe in a bank account. It also avoids the counterparty exposure that exists with investments in gold stocks, futures, and options.
There are also significant benefits of gold in its physical form. There’s no Value Added Tax to be paid on investment gold. Also, unlike many other investments, there’s no Capital Gains Tax to pay on gains of UK Sovereign and Britannia coins, as they’re deemed to be legal tender. Tax relief of up to 45% is available on qualifying gold bars as part of a pension.
Gold is globally recognized, and trusted form of exchange and has been since ancient times. Therefore, the worldwide network of dealers can provide prices twenty-four hours a day for both coins and bars.
More than just a valuable investment, gold coins are part of the nation’s historical heritage and can be both beautiful and collectible. In fact, many collectors and gold investors take great pride in their coin portfolios, often preserving them within their families for several generations. This habit also enhances limited market supply, once again affecting gold’s value!
Beat cash in the bank
Investors nationwide are nervous about a possible new global banking crisis. The very regulations of banking have changed forever, with the perception of strength and safety now a thing of the past.
Several of our large high street banks are now partially nationalized. With interest rates and therefore savings rates, at all time lows, returns on bank deposits are negligible or even harmful. Merely saving money in deposits is no longer the haven it once was.
Trust and faith in numerous major world currencies are at an all-time low. Concerned savers and investors are seeking a new, more reliable store of wealth and many have turned to gold. Just leaving your savings in the bank and burying your head in the sand will not safeguard the value of your money. Proactive savers are now moving some of their money into gold, to reduce their exposure to traditional currencies.
While gold prices do have the potential to increase, you should be aware of the additional costs and risks involved when investing in gold.
If there is something positive about it that makes people want to purchase gold in droves, then there are going to be some negatives that make you think twice, too.
High making charges
You have to pay very high making costs, especially if you go for exotic designs.
The purity of gold is another problem that one encounters in case of jewelry. Most of the time, it may not be of the level that is being claimed. Though this issue has receded due to the widespread use of ‘hallmarking,’ it has not been entirely resolved. After the hallmarking services test only a section of the gold jewelry submitted for testing, there are concerns with the hallmarkedjewelry as well.
Less resale value
Most jewelers are ready to exchange the gold sold by them at market rate, and very few are willing to pay in cash. Most of them deduct 6-10% of the value if you want hard money. The deduction is higher if you try to sell gold that has been bought from some other jeweler. This is because he will question the gold’s purity, claiming it to be suspect, and pay you less.
No regular income
Gold investment does not produce any current income like dividend or rental as in Stocks or real estate where investors can reap the rewards of their investment without having to sell their asset.
Problems in Physical storage
Lack of investment in gold is the factor of storage/handling/treatment. Storing Gold in big quantities is relatively risky and expensive. Nevertheless, there are possibilities for gold investment in the form of a certificate or an account in which the owner does not hold the physical gold but later can represent it. Although there are well-established forms of gold investment today, some may still wonder whether such kind of gold investment will always be equally reliable in case of a system breakdown. Also, if storage is not proper, though wrapped in a protective cover, allowing the oxidation and discoloration.
No Financing or Leverage
When you invest in gold, you will need to have all of the cash on hand to make a purchase. You cannot use leverage, or any financing, for this type of investment or acquisition. This can severely limit the number of people that can get involved in the market.
No Tax Advantage
Investing in gold is not going to provide you with any tax advantage in contrast to other tax saving instruments available in the market.
Subject to Confiscation
One of the most significant risks of investing in gold is that it is subject to confiscation. The government could confiscate all of the gold in a warehouse if they find it necessary. In that case, there is nothing that you can do about it, and you will lose your investment.
Actual returns are less than nominal returns
If gold does go up in value, the gain is theoretical rather than a real increase in buying power. This is because when gold appreciates it usually coincides with devaluation for paper money. Moreover, those gold profits are taxable.
An unlucky social aspect in most families in India related to liquidity is because gold has sentiments attached and is the last item to leave in case of money-related difficulties. This negates the entire objectives of gold as a liquid asset.