Why Americans Should Invest In Gold
Gold. Gold. Gold.
A commodity that seems to be on everyone’s mind these days.
Some folks have always sworn by gold, and others are just now getting the gold bug.
The financial chaos that has resulted from coronavirus and now a neck-and-neck presidential race, has pushed many to consider investments in gold.
James Jason of Mitrade, a commodities trading platform, states,
“History has shown that during economic slowdowns, from the Great Depression to the COVID-19 pandemic, gold appreciates in value.”
And in fact, he is correct. Gold is currently at $1,948.30, rising significantly after a dip at the end of October.
Regardless of the state of the economy, gold offers a good way to diversify your assets. Many financial advisors recommend keeping anywhere from 5% to 10% of your portfolio in it. Some are even suggesting up to 15% in times of crisis if you can afford it.
There are two main ways to invest in gold.
- Physical gold, or bullions
- Gold securities such as stocks, funds, and futures
Today we will break down these two ways and take a look at what the pros and cons of each are.
Investing in Physical Gold
Physical gold comes in many forms and sizes, each with its own characteristics and costs.
Gold bullions are one form of physical gold. Bullion often refers to gold in bulk form, usually bars or ingots — also known as pressed bars.
Typically, gold bars are poured, and ingots are pressed, which is cheaper. As a result, bars command a higher premium, or added cost, over the daily spot price of gold than ingots.
Both bars and ingots vary in size from quarter-oz. wafer to a 430-oz. brick. Both are stamped with purity, origin, weight, and place of minting. Remember, not all gold is equal, and your gold must be 99.5% pure to be considered investment-grade.
Bullion bars and ingots are sold by banks and gold dealers. Banks often offer physical gold at a lower-markup than dealers but finding a branch that actually has it may be harder.
Gold Coins are another common way to buy physical gold. The prices of gold coins are based on their gold content, also known as their “melt value,” plus a 1%-5% premium.
Minted bullion coins are available from major banks, coin dealers, brokerage firms, and precious metal dealers. Some of the most widely recognized are American Gold Eagle, Australian Gold Nugget, Canadian Maple Leaf and South African Krugerrand.
Are you prepared for a bull mania in precious metals?
Pros And Cons Of Physical Gold
Owning physical gold comes with numerous pros and cons.
Some advantages include:
- A hedge against inflation
Gold advocates argue that, as a tangible asset, gold maintains an intrinsic value that always reflects the cost of living.
- A counterweight to stocks
Like other commodities, gold acts as a counterfoil to equities, usually moving in the opposite direction of the stock market, making it a great diversifier.
- A safe haven
Gold’s seen as a safe haven in uncertain times or whenever there’s socio-political turmoil. For example, after the 2016 Brexit vote, its price rose over 10% in one month. Or right now in America.
- It’s virtually indestructible
“Physical gold cannot be hacked or erased,” says Charles Stevens, COO of Bullion Box Subscriptions.
Some cons include:
- It’s expensive to hold
Storing gold at home carries the risks of theft or loss. You’ll also want to insure your gold if kept at home, which adds additional costs. Keeping it in a commercial facility incurs storage costs, often based on the size and value of the holdings (anywhere from .5% to 2%).
- It’s not liquid
Physical gold can’t be sold with a press of the button or a call to a broker. Even with dealers acting for you, a sale can take days or weeks to settle.
- It does not produce income or profit
A $1,000 investment in bullion buys $1,000. Physical gold doesn’t generate interest or dividends. The only potential for appreciation is if there’s a jump in prices that lets you sell at a profit.
If owning physical gold doesn’t sound appealing, not to fear. There are many other ways to invest.
Gold Stocks allow you to buy shares of companies in the mining, refining, or other aspects of the gold production business. There are about 300 of these companies on the stock market!
Gold ETFs and mutual funds are great options for more convservative investors. These funds have varying investment approaches: gold-backed ETFs tend to invest directly in physical gold, while mutual funds favor gold mining stocks. Some funds invest in both.
Regardless, both offer an easy, liquid, low-cost way to get into the gold market.
Experienced investors can also consider an option on a gold futures contract. Like any financial option, these represent the right (not the obligation) to buy or sell an asset (gold in this case) at a specific price during a specified window of time.
Pros and Cons of Gold Securities
Just like physical gold, or any asset for that matter, gold securities have their own pros and cons.
Some pros include:
- It’s a liquid investment. Because they trade on major exchanges, gold securities are easier to buy and sell than bullions.
- There’s potential for compounded returns. While dividends offered by miners are typically average at best, they are greater than no dividends at all. There is also the possibility of appreciation in the share price.
- It requires a low initial investment. The most cost-efficient way to invest in general, mutual funds and ETFs let you in on the game at a far lower cost.
Some cons include:
- It’s volatile. Just as with any company, a miner’s operating costs, reserves, and management all play a factor in its performance. As a result, shares prices tend to be more volatile.
- There are systematic risks. A gold mining company’s share performance also reflects in political and economic conditions in its native country. Some of the biggest gold operations are in Africa, Russia, and Latin America, which all have their fair share of unrest.
- You don’t own gold. Gold securities represent physical gold, but you don’t have the right to redeem them for the actual metal. In other words, they don’t protect against a paper currency or financial market meltdown that the metal itself does.
The decision to invest in gold is not one to be taken lightly. How much and what form to invest in will vary based on your individual needs and finances. But we hope this breakdown will help you decide if you should move on the gold market today.
To a richer life,
The Rich Life Roadmap Team