Why Should You Be Investing in Gold?
Discover Why Smart Investors Are Buying Into Gold
Is Investing in Gold a Good Idea?
Is Investing in Gold Safe?
Can I Make Money Investing in Gold?
What Are the Main Benefits of Gold?
Why Invest in Gold? As an investor there are endless opportunities available when it comes to adding to your portfolio. From stocks and shares, to real estate, cryptocurrencies to fine art you can follow your interests or follow the crowd, go for the new and the high risk or play it safe.
So why buy gold?
Gold is most definitely an established market. It’s one of mankind’s longest-standing precious assets, our love for this shining metal dating back to the dawn of civilization.
A recent study by J.P. Morgan Asset Management has shown gold to be clear winner in terms of annual return compared to a wide range of traditional investments, beating most markets by a considerable margin:
It’s a market that has it’s loyal fans ($100bn in daily gold trade suggests there are more than a few) but equally there are a number of big name haters – Warren Buffett famously called gold a “pet rock” because it just sits there producing no dividends or interest.
And he’s right – gold doesn’t have a yield in the same way as stocks and shares do, or money in an interest bearing account – but then neither do other physical assets like your home, bare land, works of art, fine wine, or antiques and yet we still buy them.
What is it that causes countries, nations and big institutional investors to be stocking up on the yellow metal in record volumes? Why are Swiss refineries having to work 24-7 and still remain behind demand?
Gold is an Excellent Store of Value – Gold Protects Wealth
There’s a reason the wealthy remain wealthy – they’ve learned how to KEEP the money they’ve earned. Why is it that generational wealth can pass down through multiple decades and sometimes hundreds of years – yet remain untouched by the ravages of inflation, market crashes and conflicts? One word: gold.
When countries are looking to protect their sovereign wealth, to have a solid foundation upon which to borrow money on the global markets, to convert their trade or taxation surpluses into a real and physical asset or to help stabilize their country’s value in the eyes of the world – where do they turn? Gold.
The reason for this is simple. Gold protects against inflation and safeguards against financial market losses.
Unlike paper currencies, gold’s supply is finite; central banks can’t print gold in the same way as they print money. No amount of accounting wizardry that creates money out of thin air can be used to bring new gold into being.
As we said on our main gold page $100 placed in a box in the early 1970s and opened now would have a tiny fraction of the buying power it had when sealed. Money has been devalued by inflation – a side effect of printing yet more and more imaginary money. Food and goods don’t go up in value, it just takes more devalued currency to buy them every year. Your annual raise isn’t really a raise – it’s simply rebalancing your work value to tally with a diminished dollar.
Had that $100 been converted to some gold coins and they’d been placed in the same time capsule until today – you’d find that their buying power now was more or less the exact same as today as it was in the 70s.
The paper we consider as money and work our whole lives to save is continually lessening in real value. Gold doesn’t, and so it’s little wonder the wealthy use the same strategies that have worked since the beginnings of civilization. They buy – and hold – gold.
The other way that gold protects wealth is by acting as a market hedge. Although it’s value when looked at in paper currencies can be seen rising steadily across time, on a smaller timeline gold’s price can be seen to be much more volatile.
As much due to currency fluctuations and interplay between one currency and the next, the price of gold is also affected by other markets such as stocks and shares, futures, traded funds and commodities.
A hedge is effectively part of a bet on two opposing outcomes. You think shares are going to do well over the next few years, you buy shares – but you also take another position in case you’re wrong.
Although not set in stone, gold will typically remain flat or reduce slightly while stocks are rising, but in a financial crash gold will usually rocket – a correlation that’s strong enough to see the wealthy and large fund managers use gold as a form of guarantee.
But it’s not just big-time traders or the super rich who buy gold as a hedge.
In the last big crash of 07-08 when millions of Americans saw their 401ks and IRAs slashed by a half, gold reached record all-time highs in USD boosting the values of retirement accounts heavy in the metal.
Back to now, wealth managers have once again started advising their clients to stock up on gold, countries are buying in record volume and analysts are making worried noises that something big could be on the horizon. Even looking at the approximately 10 year boom/bust cycle of our financial markets it’s plain to see we’re starting to look long overdue on the next crisis.
Once again gold is getting ready to do it’s job protecting wealth.
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Is Investing In Gold A Good Idea?
This depends on your circumstances. Given what we said above, if your investments are heavily biased towards stocks, shares and other paper assets – or if you own more than one piece of real estate investment, it wouldn’t hurt to look into taking precautions.
Is investing in gold smart?
Most financial advisors open to a healthy diversification of assets suggest putting aside between 3-10% of a portfolio to gold. There are those who say 50%, but they are very much in the minority – however given the predictions that the next crash will make 07-08 look like a sunny picnic, who knows.
It makes less sense if you don’t have a lot of spare capital, or any investments. You wouldn’t be hedging against investment risk, simply looking for asset appreciation.
While gold does go up in value (it’s averaged 9% per year over the past 45 years) and is known to rise steeply in financial crises, there are other investments that can perform better in the short term. They may be subject to the exact same risks that gold is used to protect against, but with a low cash sum to invest this could be more beneficial to you than the protection gold would offer. After all $5k in gold, even if it doubles in price during a banking and real estate crash is unlikely to be able to help you when your home is worth half and becomes a major financial burden.
For those with $25,000 or more to invest, gold suddenly becomes a very useful tool and it’s at this level that gold comes into it’s own.
One of the best ways to buy physical bullion is through a Gold IRA – when the government gives you a tax-advantaged route to making any investments, it’s wise to make the most of it. The other key advantage to having gold in an IRA is the protection it can give you at a time when you need money the most: retirement.
You didn’t work for 40 years to lose it all because some greedy bankers decided to play on the stock market.
Is Investing In Gold Safe?
We’ve already established gold as a safe-haven asset, used to secure wealth – be it a country’s wealth, generational wealth, personal assets or a retirement account.
But what are the safety issues in investing in gold? Is investing in gold high risk?
Gold is obviously subject to risk of theft. When people picture bullion bars they often think of The Italian Job or Goldfinger where thieves make off with a fortune in gold bars (albeit with no success)
Because gold is a concentrated portable source of wealth, this makes it easy to steal. It’s also very easy for criminals to remove a gold bar’s identity, melting it down and reforming it as a new bar, plus being unreactive to anything other than the strongest acids, gold can be buried for as long as the thief wants with no damage. If it’s stolen – it’s gone.
Therefore it’s essential to store your gold safely – whether in an adequately insured safe at home all with you resisting the urge to tell a soul about it – or in a secure and fully insured vault. We cover gold storage and vaulting in detail here.
With your gold secured, there’s little to no chance of theft and even if it were to happen you’re insured.
The other type of theft often raised in connection to investing in gold is governmental confiscation. Confiscation is not outside of the realm of possibilities – after all it’s not like the US government doesn’t have form in this regard. 1933’s Executive Order 6102 called for a handover of any private citizen’s gold over 5oz. It was made to help create more dollars which at the time were still based on gold. In the event, very few were prosecuted and there are no accurate figures on how much was raised, likely due to very low observance of the law.
It’s true under current federal laws, gold bullion is still able to be confiscated by the government in times of national crisis – however in a crisis there are far lower hanging fruits for today’s government to pick from than an individual’s collection of gold coins.
With banking being wholly digital and bank bail-ins already signed into law, it’s far more likely everyone with any spare capital would see it taken from them in a click of a button than having the feds going door to door confiscating 10oz here and 15oz there. Additionally the dollar is no longer tied to a Gold Standard and if the government wants to print more money it simply needs to add extra zeros to the end of a computer balance sheet.
Finally the remaining risk in gold investment is the possibility of a drop in value.
As with any investment, gold does rise and fall continuously throughout the space of a day due to trading on the global markets, geopolitical events, currency movements and other market forces.
And although gold has seen an averaged 9% annual growth over the past 45 years, on a smaller time-frame it can be subject to rises and falls, value crashes and record peaks – where gold does it’s job acting as a hedge investment and then correcting in price after the crisis has passed.
Unlike stocks, cryptocurrencies and any other paper or digital asset it’s so unlikely as to be impossible that gold will ever reach a zero value. It’s too rare, too important to society, industry and our very psyche, it’s psychological value built up over human history to ever have no value to us.
Companies can come and go, nations and empires rise and fall – but gold will always be gold.
Is gold investing wise? If you doubt it, then it’s down to you versus history.
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Can I make Money Investing In Gold?
We’ve already mentioned gold’s average annual increase over the past 45 years, and gold’s skyward price leaps during times of crisis. So can investing in gold make you rich?
Like any asset with an overall tendency to rise in price, it will increase in value over time. Add it’s shorter term volatility, it’s global popularity and it’s high liquidity and you have a potent mix for profitability.
Despite gold typically being used to maintain wealth, protect it during crises and reduce the effects of inflation it absolutely can be a way to make money.
To take best advantage you need to develop a more active strategy than simply buying and holding. Although more risky – especially to novices – you can time buys and sells to take advantage of the daily, weekly and monthly rise and fall of the markets. Buying at the price lows and selling at the highs is the very basis of trading and is equally applicable to physical metals as it is to paper or digital assets. Perfect timing and reducing buy/sell fees to a minimum is essential, but for someone with a good eye or an understanding of market dynamics there are significant sums to be made.
Even without constant trading, it makes sense to buy low and sell high and this is what many precious metals investors and home stackers do, moving between gold and silver depending on what is comparatively over priced or under-priced.
Similarly you can play an arbitrage game, find a source that sells a gold bullion product lower in price and sell it some place else higher. In short you become a small-scale bullion dealer. If you scale this enough you can attract excellent wholesale deals, buying at trade and selling retail. This is how every successful national and international bullion dealer started – from humble beginnings to multi-billion dollar companies.
Finally – and although this involves much more work than most gold investments – there are gold investors who buy scrap gold jewelry and electronics waste from the public at 40-60% discount before sending this to refineries where it’s made into pure gold bars. Even with refinery costs built in this still results in the investor owning bullion at a fraction of it’s market price.
If you can cope with higher risks these methods are all capable of producing significant income and profits from gold.
For everyone else we have to make do with the 25%+ price increases gold makes some years and comfort ourselves with it’s year-on year beating of major stocks and markets. We think that’s why investing in gold is a good idea.
To summarize, is investing in gold profitable? Yes – but just how profitable versus market gains depends on how active you want to be and what your tolerance to risk is.
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Is Gold Better Than Cash?
For buying milk at the corner store no. Cash is unbeatable for small daily transactions and this is why we have it. Circulating money is a very useful and mostly anonymous medium of exchange.
But would we recommend cash as an investment? Absolutely not.
Every second of every minute, every day the money in your wallet and your bank account is losing value to inflation. And with headline inflation rates being so heavily manipulated through constantly changing the method by which they are calculated you can guarantee your dollar is shrinking far faster than what the government is telling you.
Think a “high interest” bank account will cover you? The banks know their money is continuously losing value – after all it’s them who are creating new money out of thin air, so it’s very unlikely they will want to pay you more than they are losing. Yes it may slow the loss, but even a high interest account in these days of ultra low interest rates will see your money dwindle in real terms.
Gold on the other hand, it’s use as a store of value established over millennia, rises in value over time to counter inflation.
A gold coin that would once have bought a suit of armor would today still buy a beautiful tailored suit – the modern day armor of desk-bound business knights. The price of a sheep in biblical times when measured in gold, is still broadly equivalent to the price of a sheep today.
Imagine your great-great grandfather locking away a $100 bill for a future generation. In 1900 the average average American earned 22 cents an hour, so this $100 would equate to a huge chunk of his annual salary. This was a valuable note and one he was sure his children’s children would enjoy.
What magnificent things could you do with that $100 now? Trip to the cinema with your family? A meal out?
What if he’d exchanged it for gold and silver? In 1900 $100 would have bought 5oz gold coins and 8oz in silver.
The box he’d sealed for your future benefit would no longer hold $100, but metals worth over $7600 at today’s price – a near exact equivalent to their buying power back in history.
$7600 could make a real difference in someone’s life. $100 much less so.
With this in mind, by all means hold some cash for it’s use in making purchases, but as for holding onto dollars as an investment for any length of time – it only pays if you convert them from paper dollars into real money.
The only real money in these days of fiat currencies are precious metals like gold and silver.
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Is Gold Better Than Shares?
This isn’t a black and white, gold vs shares issue. Shares and gold both play a part in a well diversified portfolio.
Advocates for both sides of the argument can cherry pick periods of time where one has outperformed the other, or carefully select a basket of shares which have either performed terribly against gold, or taken gold out behind the woodshed.
The truth is, there are some excellent shares which have massively outperformed the market over a certain time. Others have vanished without trace, leaving investors holding worthless certificates.
Whether you are holding Apple or Enron, Google or Lehman Brothers is down to either blind luck, incredible market knowledge or the use of a good advisor.
And good advisors also tell investors to diversify their assets – to de-risk and to hedge against other assets performing poorly.
When stock markets crash – and they do tend to do this with an alarming regularity – your hedges are there to protect you against calamity and when it comes to hedges there are few investments with the same proven history as gold.
At the time of writing our stock markets are seeing all time highs and alarm bells are ringing that prices do not reflect company earnings.
As talks of record markets make it from the financial press into mainstream media and small-scale retail investors pile in hoping for the same big gains as they’re seeing reported, the markets begin to over inflate and the institutional investors and super rich look to their hedges sensing a coming crash.
If you’re not already big in shares and so haven’t enjoyed the journey upwards this is not a good time to enter the market. If you are already in, it’s time to start making some form of insurance policy against what could be around the corner.
So with the question is gold better than shares, the answer shouldn’t be a yes or a no. It shouldn’t be an either or situation.
A well planned portfolio should contain a basket of blue chip shares and for the adventurous a few riskier ones too – but it should also contain a plan B for if the market turns – and it’s an inevitability that one day it will.
Plan B for most is gold. Whether you’re at 5% gold or 20% is down to your personal circumstances and the risk in the shares or other assets like real estate that you own.
We cannot recommend one route or another but we do recommend you speak to a professional gold investment company who will be able to properly advise you impartially and under no obligation.
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Who is Investing In Gold?
The World Gold Council reported that 2018 saw the highest level of annual central bank gold purchases since the suspension of the gold standard in 1971, as well as the second greatest annual total on record.
Countries continued to buy gold in record amounts in 2019, with China and Russia among those leading the charge – their officially reported figures showing an increase of 62 tons and 73 tons respectively between Q1 and Q3. Turkey saw an increase of 91 tons over the same period – a 230% increase on it’s overall holdings in 2017. Unreported figures could be significantly higher.
Analysts are predicting an unprecedented rise in central bank buying across Western Europe and European banks have also started to horde the metal all while making very positive statements on their websites about gold. Commerzbank calls gold an “anchor of trust” whilst the Dutch bank DNB describes gold as the “ultimate reserve asset.”
The super-rich are also moving into physical gold, much more so than they have in recent years.
Goldman Sachs have confirmed that the global elite are rushing towards bullion in preference to paper assets, their recent wealth management report saying:
Since the end of 2016 the implied build in non-transparent gold investment has been much larger than the build in visible gold ETFs… This [data] is consistent with reports that vault demand globally is surging… Political risks, in our view, help explain this because if an individual is trying to minimize the risks of sanctions or wealth taxes, then buying physical gold bars and storing them in a vault, where it is more difficult for governments to reach them, makes sense.”
To paraphrase a much longer report into plain English, the rich are buying physical gold, readying themselves for a potentially severe crash.
In 2018 America had over 5 million High Net Worth (HNW) and Ultra High Net Worth (UHNW) individuals – so it’s probably not surprising to learn America is also home to the most bullion dealers in the world – and they’re busy.
But it isn’t just the super-rich. The American prepper movement is getting ready for what it sees as a significant socio-economic crash and is buying up gold and silver for an event which could see the dollar devalued significantly.
Once seen by many as little more than tinfoil hat conspiracy theorists, preppers are now being joined by major US corporations making plans for a forthcoming financial disaster and analysts are predicting an impending implosion describing our current financial system using words such as “lunacy” and “impossible”.
Of course they may all be wrong and everything will continue as is – but even a cursory look around outside, at boarded up malls and at once great American businesses closing their doors for good tells an all too obvious truth. Something is wrong.
But putting aside talk of crashes and the predictions of very well paid analysts, gold is just a smart investment. It’s historical use as a store of value continues and with it’s average 9% annual price rises over the past 45 years, it remains a consistent and steady performer.
This is why millions of ordinary Americans are adding a percentage of gold in their retirement accounts or diversifying their stocks and other investments with some physical precious metals.
It’s a reliable, dependable investment. It just so happens it could also save you in a crunch.
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An IRA is like any investment in that you want it to increase in value over time. What’s different about an IRA is that it’s a tax-advantaged way of buying specific investments, where these tax savings are gifted to us by our federal government as a way of helping reduce the costs of retirement planning.
The whole purpose of an IRA is that it’s there to help provide for you in your retirement.
If you don’t want to end up penniless at 70, working long into your senior years or depending on your children and grandchildren, then creating an effective retirement plan is not something to be taken lightly.
This is why the crash of 07-08 hit IRAs and 401k plans so badly – especially for people close to retirement age at the time. When the financial crisis struck, it wiped 50% from the value of millions of retirement accounts almost overnight.
Carefully thought out plans for a carefree retirement were decimated and standards of living had to be scaled back drastically. It doesn’t matter that 6 or 7 years later the markets were back on track – for those now in retirement who’d been so badly affected the damage was done and their life had taken on a very different quality to the one they’d hoped for.
At the same time as the crisis was destroying hopes and dreams for many, gold was soaring to record highs. Investors desperate to sell their rapidly falling stocks and shares were rushing for safe-haven investments and gold the most famous of them all saw an immense rise, both during the crisis and in the years immediately after as small-scale retail buyers got into the market hoping to recoup some of their losses from the crash.
For those retirees who’d been advised of gold’s benefits as a hedge before the crash and who’d added physical bullion to their IRAs – it was a different story.
Gold’s climb had compensated any stock losses their account had seen. Even if this hadn’t resulted in an overall profit (unless the account was mostly invested in gold) the retirees were looking at broadly the same levels of money in retirement as they’d planned for. Gold had performed the exact task it had been added to help achieve.
As with any investment portfolio it pays to have diversification and a hedge. By not having all your eggs in a single basket you increase your chances of growth and reduce your risks. An IRA shouldn’t be any different and because it’s for your later years it’s all the more important to get it right.
We have a full section looking at Gold IRAs which examines the processes required and details what can and can’t be added to an IRA. Provided you follow these simple rules or work with an IRA professional, there’s no reason why adding gold inside an IRA should be any more difficult to buying any investment and with the right advisor it can be much easier.
And besides who wouldn’t want to make tax savings when buying gold?
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