Investing in Gold
Dear Rich Lifer,
Gold has always been something that humans have seen as both an investment and a source of value.
When the stock market is volatile and the economy is ever shifting, many investors begin to ask, “Should I invest in gold?”
Gold prices have been rising higher and higher. Today it is trading at over $1,900 an ounce, a milestone not seen since 2011.
With coronavirus adding more and more uncertainty to the markets, it seems that the price of this golden commodity will continue to rise.
Before jumping the gun on an investment, it’s important to double-check your goals and long-term investment strategy, and make sure it fits appropriately into your portfolio.
Like any investment, there is always the risk of loss — so make sure you have all the facts.
Here are some things to consider if you think you are ready to join the gold rush.
Why Is Gold Rallying?
Gold is up around 19% due to lower interest rates and central bank stimulus.
Gold is typically seen as a “safe haven” asset in times of uncertainty because it is less volatile than other investments, like stocks.
Additionally, gold moves inversely to the U.S. dollar, meaning that when the dollar moves lower, as it has done lately, gold moves higher.
However, the current economic downturn due to coronavirus is different from other economic downturns.
Because equity markets have continued to rally, Cameron Alexander, Director of Metals Demand at Refinitiv, stated, “Gold is being pulled in two directions: One is the uncertainty,” of the global pandemic.
As the pandemic shook up markets in late-March, gold suffered a sell-off as investors rushed to free up cash.
However, since then, buyers have returned to gold and inflows into physical gold exchange-traded funds (ETFs) globally is around $12 billion, according to BlackRock.
Experts are predicting even higher swings. In fact, in April, Bank of America said the precious metal could hit $3,000 per ounce.
BofA Securities’ commodities strategist Michael Widmer stated, “At the moment there’s an awful lot of concerns [keeping gold up] … We need a little bit more visibility before gold prices start peaking.”
Is Now The Time To Buy?
Albert Cheng, CEO of Singapore Bullion Market Association, said the question should not be “when to buy” to “how much?”
Cheng believes that there is never a bad time to buy gold and that every good investor should have gold in their portfolio.
A financial advisor would typically recommend a gold allocation of 1% to 5% of an individuals’ overall portfolio.
This is believed to be good advice because it acts as an insurance policy. If you lose all other stocks in a crash, your gold should follow historical trends and go up in value, keeping you from losing everything.
However, Cheng said the recommended gold allocation could shift higher from 5% to 15%.
It’s also important to remember that gold comes in many forms, so one form may be better suited for your investment strategy than others.
So if you’ve decided you definitely want to invest in gold, now you need to decide how….
How To Invest
Although gold is one of the world’s oldest commodities, there are now multiple ways to invest in gold.
Each investment strategy comes with pros and cons, so it’s incredibly important to decide first why you are wanting to add gold to your portfolio so you can be sure you are investing in the right “type” of gold.
Here are some examples of types of investments:
Physical – Physical gold bars and coins are the most traditional way to own gold. Physical gold assets can now be purchased at banks, among other places.
If you decide to invest in physical gold, such as coins and bullion, you will need a safe place to keep it. You can manage the storage yourself by buying a strong, reliable safe for your gold. If you can’t store it on your own premises, you can use a safe deposit box at a local bank or credit union.
There are also facilities designed to hold large amounts of gold, but these places will come with a fee to store your new investment.
Note – physical gold is also taxed at a collectables rate. Long-term capital gains are often taxed at a lower rate than your own marginal rate. However, this rate doesn’t apply to physical gold.
ETFs/ETCs – Exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) are vehicles that allow you to track the underlying price of gold without having to physically hold the asset. These contracts represent the right, not the obligation, to buy or sell an asset (gold in this case) at a specific price for a certain amount of time. Options can be used whether you think the price of gold is going up or going down.
These are a good investment if you’re simply looking to diversify your portfolio because they come with the lowest risk.
Gold-Related Stocks – Companies directly linked to gold, such as gold miners or gold producers, are another way to hold gold, as they tend to mirror its performance. If you like the idea of the exposure to gold, but don’t want to hold a physical stock, this is a great option. However, they are also susceptible to stock market swings.
Alternatives – Alternative vehicles such as gold-backed cryptocurrencies or foreign exchange trades offer another way to buy into gold. These are typically for more experienced investors, so proceed with caution.
Another thing to look out for is “paper gold” or “gold certificates.” They may seem like an easy way to invest, but when you buy “paper gold” you never actually see or hold the gold.
In economic downturns there are a plethora of scammers, so if you want to get a “gold certificate” make sure you use a certified broker. With “paper gold,” there’s a chance that shady companies could actually sell the same gold multiple times. When you go to cash in your investment during an emergency, such scams are revealed.
The bottom line is, investing in gold, whether the physical commodity or gold-related securities, is a complicated decision and not one to enter lightly. Do your research to make the most informed decision.
To a Richer Life,
The Rich Life Roadmap Team