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Gold is historically one of the most important precious metals in the world and is well known for its value and prestige. Gold is also an appealing investment vehicle, but as with any investment, research is essential. Understanding the benefits and risks of buying gold will help you make an informed decision about whether it’s the right option for you.
Why Should You Buy Gold?
The main reason to buy gold is to diversify your portfolio and hedge against inflation. Historically, gold prices have had an inverse correlation with paper markets — gold prices rise as currency values drop because investors move to a more secure investment vehicle. Similarly, when paper currencies are strong, the gold price drops as investors sell their gold to buy into bullish paper markets.
In practical terms, this means that having a store of physical gold or precious metal ensures that your investments are always generating income, either by earning interest or dividends via paper income or through the rising gold price.
Secondly, buying gold means investing in something physical. Physical gold provides a sense of security in having a tangible asset instead of seeing some numbers on a computer screen.
The Benefits of Investing in Gold
Gold and other precious metals offer unique benefits that make them a valuable option to consider when expanding your portfolio. But why buy gold instead of other physical assets? Gold’s unique benefits include the following:
An Inflationary Cushion
Economic downturns result in high inflation, which limits your buying power and can cause financial distress. Since gold’s value isn’t tied directly to the economy, it remains stable, providing you with a buffer during harsh economic times.
Traditional Hedge Asset
Most investors view gold as a good investment to hedge against inflation and low currency values. Historical trends indicate that as currency prices drop, the spot price of gold rises due to investors moving to a safer investment. And gold’s popularity as an investment means it gets more attention than other physical commodities, and gold prices may rise faster than other investments.
There’s nothing worse than investing in a physical asset and finding it difficult to convert it back into fiat currency. Liquidity is an essential component of the safest investments, and luckily, the demand for gold means that you will generally find a buyer willing to purchase when you want to sell.
Almost Universal Value
Cultures from across the world recognize the appeal of this valuable commodity, allowing you to trade globally with few limitations.
One of the most appealing reasons to purchase physical gold coins is that they often have a numismatic value in addition to their gold price. Numismatic value refers to the intangible value associated with rare coins, which increases over time as coins fall out of circulation.
A rare gold coin will often cost significantly more than its base gold or silver spot price. Many people who buy gold also become avid coin collectors due to the collectible nature of certain gold and silver coins.
While historical trends are no indication of future performance, gold’s price has risen from under $300/troy ounce in 1971 to over $1,600/troy ounce in 2022. As more industries start to require gold for manufacturing and electronics and the mining cost continues to increase, it’s likely that these rising prices will continue.
Low Long-Term Volatility
As with most precious metals, the day-to-day spot price of gold can be quite volatile, but historically, gold has increased steadily every year. The finite supply and steady demand for gold from industries and investors, along with the lower impact that economic conditions have on its price, keep gold’s cost relatively stable.
Gold is a remarkably durable material that doesn’t rust or decay. Archeologists have uncovered gold jewelry from 4,600 BC that remains in pristine condition despite its age. Few other physical assets, even other precious metals, can boast the same type of longevity, making gold a good choice for the long-term investor.
Many want to ensure the best possible future for their children, including passing on wealth from generation to generation. Gold’s longevity, rising value, and tax advantages make it a potential avenue for preserving wealth across generations.
Peace of Mind
It’s easy to underestimate the psychological value we attach to gold. Knowing that you have a portion of wealth put away that has value now and in the future can be deeply reassuring, especially in a troubled economic climate.
The Risks of Gold Investing
As with any other investment, gold has several drawbacks compared to other assets. It’s up to you and your personal financial advisor to decide whether these risks outweigh the benefits of purchasing gold.
A few risks of investing in gold include:
- Safety concerns: Physical assets are susceptible to theft, fire, and damage. Storing gold at home can increase your risk of break-ins, especially if you tell others about your purchase. Storing your assets with a third-party facility can alleviate these risks — most reputable companies have an insurance policy that will protect your gold in the event of theft or natural disasters.
- Fees: Buying gold involves paying more than just the price of gold. You also need to consider seller’s fees that raise the price, which may affect your investment, especially if you’re trading gold in the short term.
- No passive income: Stocks and other paper investments generate a passive income many people use to supplement their current finances. While gold does gain in value, the only way to get income from your investment is by selling it.
Is Gold a Good Inflation Hedge?
Even the best thought-out stock market or currency investment is susceptible to external factors that cause adverse price movements and can result in devastating financial losses. Hedging is like an insurance policy for your investment — it provides a layer of protection to buffer your portfolio from the vagaries of the market.
Investors typically view periods of higher-than-usual inflation as a risk to their investment. This is due to the higher prices for commodities and the fact that governments tend to lower interest rates to encourage people to borrow and spend more money. These factors lead to a decrease in investment values for most assets tied to the economy, including stocks and futures.
The ideal hedge has a 100% inverse correlation to your main portfolio — it rises in price commensurately as your primary investment drops. Unfortunately, the perfect hedge doesn’t exist, but some commodities are popular options to protect your portfolio.
Most people buy physical gold as a hedge to protect their other investments. The price of gold has little correlation with the performance of stock markets and other paper commodities, making it an appealing candidate as a hedge investment.
In general, gold has a strong inverse correlation with high inflation periods. According to the World Gold Council, the U.S. only experienced eight years of higher than 5% inflation between 1971 and 2008. During these periods, the price of gold increased by almost 15% during the same time frame.
It’s important to note that this correlation doesn’t apply during moderate or low inflation periods, when gold still increased in value. A major problem with most hedge investments is that they do not provide the same level of returns as stocks or futures, but since the gold price has shown a consistent rise in value, it does offer a modest ROI of its own.
How to Invest in Gold or Precious Metal
How you decide to invest in gold will depend largely on your goals.
Many people buy physical gold and silver to store at home in case of an emergency. If you’re concerned about your paper financial assets, having this store of wealth should be enough to give you peace of mind, with the advantage of being liquid enough to sell whenever you need to.
A popular method of investing in gold is through a self-directed IRA, or gold IRA. An IRA, or individual retirement account, is a tax-advantaged investment that allows people to save for retirement. While most people invest in a traditional IRA, the IRS also permits certain forms of physical goods to form the bulk of your IRA’s investment, including government-approved gold and other precious metals.
Where Is the Best Place to Buy Gold?
If you just want to purchase physical gold, you can visit any pawn shop or gold store in your area. However, doing so has several drawbacks, including that it may be difficult to verify the purity of the metal and that you risk overpaying for coins or jewelry.
The best way to start investing in gold is through a reputable dealer, such as Oxford Gold Group. These dealers will handle every aspect of the transaction, including finding a seller and recommending the right storage options for your physical gold. While reputable dealers will charge for their services, it’s well worth the reduced risk and peace of mind.
What Is the Safest Way to Store Gold?
Depending on how much gold you buy, you may start storing gold in a safe at home. However, doing so opens you up to the risk of theft, especially if word gets out that you have such a valuable commodity in your possession. Still, if you decide to go with self-storage, here are some tips to keep your bullion in mint condition:
- Avoid humidity and fluctuating temperatures. If possible, store your gold in a climate-controlled area.
- Keep your physical gold away from other objects, as these can easily dent or scratch your precious metal. While this may not be a problem with gold bars, it will affect the numismatic value of any gold coins.
- Make sure your storage solution can handle the weight. Gold is a very dense material — a standard gold bar weighs approximately 27 pounds — the more gold you buy, the stronger your storage solution needs to be.
- If your gold bullion comes in a protective case, store it in that case.
Alternatives to storing physical gold include bank safe deposit boxes or third-party storage solutions. If you have a self-directed IRA, you must adhere to the IRS’s stringent regulations regarding approved storage facilities. While these third-party solutions will charge a fee, they offer several advantages, such as arranging transport and delivery, providing storage suitable for gold and other precious metals, providing high-end security, and offering insurance against theft or loss.
What’s the Right Age to Start Investing in Gold?
There is no absolute perfect time to buy gold. When you start and how much you buy depends on your purchasing power, risk profile, tolerance, and needs. As with any personal finance decision, it’s best to speak to a professional wealth advisor or investor who knows your situation and can provide unique investment advice tailored to your goals.
Various age brackets tend to have different investment priorities. While these are generalizations, they do provide examples of why a diverse portfolio that includes gold as a financial asset can be suitable for all ages.
- 18 to 30 years old: Investors at this age tend to have little disposable income and purchasing power. However, this is the perfect time to start planning for the future, and putting some money aside for stocks or any other investment now will reap great rewards in the future. And if the gold price continues to rise, it will provide a comfortable nest egg and emergency value store. While gold is a popular precious metal, it’s not the only option — silver is more affordable and an excellent starting point for investing in physical commodities.
- 31 to 40 years old: People in this category tend to be in established jobs earning a stable income. They are more risk tolerant, as they can weather losses in the stock market or other investments, and adding gold to the portfolio can alleviate risks associated with fluctuating economic conditions.
- Over 40 years old: Older individuals often prefer the stable demand for gold and can afford the insurance costs associated with storing large amounts of gold bullion. They also have more flexibility to purchase gold securities, stocks in gold mining companies, and other gold-related options that further diversify their holdings.
Gold’s intrinsic properties mean that it can be a suitable option for people of any age, and there is no wrong time to start. Gold prices and the rising demand for the metal may result in further increases in value, so the sooner you start, the higher your potential rewards.
Types of Gold Products
People tend to associate gold with the gold bars you see on TV and in movies, but smart investors can find many unique ways to make investments tied to the gold price.
Gold Coins and Bullion
Bullion refers to any form of certified pure or almost pure metal, and in the case of gold, it refers primarily to gold bars and coins.
Gold bullion is an excellent choice for buying physical gold, as it comes from a verified source — usually the U.S. Mint or other national facilities. These facilities maintain a high standard of purity, and every bar that leaves the mint has a minimum purity of 99.95% and a stamp and a serial number for extra security.
Mints also produce gold coins that have an established purity. Some of these coins may have stamps, such as American Eagles, while others are blank disks of metal. A stamped coin may eventually accumulate numismatic value in addition to its gold value, making it a good option for long-term investments. However, collecting is a completely different skill set, and bullion is the wiser choice if you just want to put your money in a gold investment.
Gold ETFs and Mutual Funds
Dealing with physical gold bullion requires storage and insurance costs to protect your investment. An alternative is to focus on gold exchange-traded funds or mutual funds. ETFs and mutual funds work on the same principle of using investor money to own and trade bullion and then providing returns to investors.
ETFs allow you to buy a share in the fund that represents a certain, fixed amount of gold. You can then trade these stocks without dealing with the physical hassle of bullion.
Funds are generally a good place to start your gold investment journey because they remove many barriers to buying physical goods while still taking advantage of the product’s benefits.
Futures are a contract between two parties to exchange a certain amount of an item for an agreed-upon price. This provides a stable way of trading, and, depending on markets, you may get a good amount of gold for a much better price than on the open market. They require advanced knowledge and large amounts of money, making them unsuitable for novice investors.
Gold Mining Companies
If you want to play the stock market but still benefit from gold’s stability, consider buying stocks in mining companies. As demand for gold grows, these companies make more money due to rising gold prices, raising their stock market share price simultaneously. While playing the stock market is more complex than buying gold, it’s a worthwhile consideration if you have the time and resources to do so.
What Is the Best Gold Investment For You?
Gold is a precious metal in high demand in the electronics industry and boasts a history of established value. It’s a good hedge against inflation and offers stability, making it a smart option for diversifying your holdings. However, one of the key takeaways of this guide should be that it’s not suitable for all situations, and you should discuss any financial decisions with a reputable investor or advisor before committing to your first gold purchase.