Direct investment in commodities like gold is far more difficult than to invest in stocks and bonds. This is because bonds and stocks are easy to transfer and access. Another prime reason is commodities work through the complexities of futures and options market. Which means, you cannot just buy gold or a barrel of oil and keep it idle.
Gold has been the leading currency of choice since ancient times. The most common way to own gold is by gold bullion. It is physical gold, including coins and bars that are certified. However, large gold bars become very difficult to buy or sell. Because they are considered illiquid and, you cannot possibly cut off a portion to sell a specific percentage. Smaller-sized gold bullion is more liquid in nature and is easy to trade.
Disadvantages of Gold Bullion
Storage and insurance costs are the major drawbacks of gold bullion. And, since it’s a direct investment, changes in the price affect the value of holdings proportionately. But advanced financial instruments have made it easy to invest in commodities without owning the physical form.
Gold Investment – An Attraction
Compared to securities and currencies, gold is limited in supply and acts as a hedge against market crisis. Hence, gold is a solid investment choice that proves to be insulation against inflation. Even an average investor can invest in gold provided the right timing is followed.
Methods of Investing in Gold
An exchange traded-fund is a popular investment security used to invest in gold and other commodities indirectly. An ETF represents a specific amount of gold and, are tradeable like stocks. It is economical than bullion since the only investment is the price of a single ETF. What’s more? Gold ETFs in your Roth IRA account enable tax-free earnings.
A trust owns actual gold assets and, deposits the value of gold in exchange for baskets. Unlike investing in a gold mining company, the gold ETF is free from commissions. A single purchase gives complete exposure to gold prices.
Another drawback of investing with a gold mining company is the purchase of all the equities in a single index basket targeting a specific price. This makes the investment more complicated.
Gold Mutual Funds
In the case of gold mutual funds, there is no physical gold involved. These financial instruments own stocks of mining companies. They have low-cost investment and enable diversification across various companies. Gold mutual funds are easy to own and are one of the safest ways for gold investment.
Gold Futures & Options
Futures on gold allow you to buy or sell gold on a specific future date. You can trade only in contracts and, the price of gold is predetermined. This amount is usually large and, the commissions are often very low. Gold in futures is more often than not settled in dollars as per contract specifications.
Gold options on futures allow you to buy the future contract immediately, at the present price. An investor can leverage on his initial investment and reduce the losses to a great extent. Gold options are volatile in nature since they demand a premium from the investor to own the option.
Internet Investment Gold
The latest way to invest in gold is the Internet Investment Gold (IIG). It’s the process of buying physical gold online, storing it and using it when necessary.Investors should be aware of what they are investing and should explore possibilities and solutions before deciding.
There are two prominent guidelines conceived by the World Gold Council to help investors with their gold investment decisions.
-IIG Investor Guidance
It helps investors to understand everything behind investing in gold online. They can also study different providers and choose the right product to meet their requirements.
-IIG Product Provider Guidance
It’s a blueprint for the best practices to adopt before investing in gold. It lays down sound practices and is purely for educational purposes only. It does not have legal or tax advice.
There are bullion banks that offer investors gold accounts to deposit gold, that resemble currency accounts. The investor is the legal owner of the quantity of gold. In an unallocated account, the investor has an entitlement to a specific amount of gold and, is not the legalowner.
Buying Physical Gold
Gold bars and coins are popular investment options available from jewellers, banks and other finance companies.
Why is Gold so Unique?
Gold is uncharacteristic in nature compared to other assets. Gold has set a standard for the value of all other money. This is precisely why it’s considered a source of financial safety that never goes out of value. Its price doesn’t rise with other asset classes. Also, gold doesn’t have an inverse relationship like stocks and bonds have for each other.
These are some strong points to have gold as part of a well-diversified portfolio. All other asset classes are mutually related. However, gold alone should not be your investment choice due to its speculative nature. Your portfolio should include all other commodities with investments in other assets.
Gold as Hedge
Hedges are investments that protect you from financial losses occurred in other asset classes. Gold acts as the hedge against the fall in the value of a currency. It offers a perfect defence against inflation and stock market crash. During a crash, gold prices will increase dramatically for up to 15 days. Selling your stocks and buying gold is a wise option during such situations. However, once the market rebounds, the reverse is applicable.
Gold is also a safe haven during an economic crisis. It protects investors from going bankrupt reduces the effect of economic downfall to a substantial extent. That is because, during economic uncertainty, gold prices skyrocket to a great extent. Hence, gold enjoys a prominent place under the sun where investments are involved.
Gold in your Portfolio
We know that having gold in your investment portfolio helps diversify and provides added security. However, to keep a perfect balance, your portfolio should include not more than 10% of gold. This share depends on your risk tolerance and your financial situation, where the share of gold can vary accordingly.
Among all other investment products, gold has stood the test of time. But a closer look gives an impression that gold is more a store of value and less of an investment. In other words, it’s a crisis investment that adds stability to your investment portfolio.
Protection Against Deflation
During the economic depression, business activities slow down, causing a sharp drop in the prices of securities. Excessive debt takes over, and only the purchasing power of gold soars high. Hence, gold acts as a place to hold cash during deflation.
Gold Helps Preserve Wealth
Gold has a prominence in the modern economy due to the fact that it has helped preserve wealth across generations. Whereas, the same is not the case with other securities and paper-denominated currencies. You are bound to lose a substantial amount of wealth if you hold on to currencies during inflation. However, gold’s value increases over the same time and proves to be immensely profitable.
A Final Word
All said and done, gold is and, can be a profitable investment when all other securities fail or during an economic downfall. However, you have to do thorough research and completely understand the particular gold investment you choose before actually investing. You have to be clear about the costs involved in storing physical gold and the tax differences involved in Gold ETFs and gold mining ETFs.
This unique asset is highly liquid in nature and is a luxury and an investment tool at the same time.
A Word of Caution
Despite having several advantages, gold does have its bubble. Don’t overinvest because, over time, every financial bubble, including gold, will burst. The increase in price reaches a certain point and then implodes. You have to include gold in your portfolio only as a good diversifier without going overboard. And, remember, there is no passive income derived from gold.
Gold stocks and gold mutual fund are best only for diversification during an increase in gold prices. It’s advisable not to keep them permanently or over even the long-term. They should be treated as special investments that only serve a specific purpose.
Loading your portfolio with gold is a bad idea because, during a bull market, it is bound to stagnate.