Gold As An Investment
Before jumping on the gold bandwagon, let us first put a damper on the enthusiasm around gold and at the outset examine some reasons why investing in gold has some fundamental issues.
The main problem with gold is that, unlike other commodities such as oil or wheat, it does not get used up or consumed. Once gold is mined, it stays in the world. A barrel of oil, on the other hand, is turned into gas and other products that are expended in your car’s gas tank or an airplane’s jet engines. Grains are consumed in the food we and our animals eat. Gold, on the other hand, is turned into jewelry, used in art, stored in ingots locked away in vaults, and put to a variety of other uses. Regardless of gold’s final destination, its chemical composition is such that the precious metal cannot be used up – it is permanent.
Because of this, the supply/demand argument that can be made for commodities like oil and grains, etc, doesn’t hold so well for gold. In other words, the supply will only go up over time, even if demand for the metal dries up.
The Us Bimetallic Standard
The U.S. government continued on with this gold tradition by establishing a bimetallic standard in 1792. The bimetallic standard simply stated that every monetary unit in the U.S. had to be backed by either gold or silver. For example, one U.S. dollar was the equivalent of 24.75 grains of gold. In other words, the coins that were used as money simply represented the gold that was presently deposited at the bank.
But this gold standard did not last forever. During the 1900s, there were several key events that eventually led to the transition of gold out of the monetary system. In 1913, the Federal Reserve was created and started issuing promissory notes that could be redeemed in gold on demand. The Gold Reserve Act of 1934 gave the U.S. government title to all the gold coins in circulation and put an end to the minting of any new gold coins. In short, this act began establishing the idea that gold or gold coins were no longer necessary in serving as money. The U.S. abandoned the gold standard in 1971 when its currency ceased to be backed by gold.
Gold As A Hedge Against The Dollar
The idea that gold preserves wealth is even more important in an economic environment where investors are faced with a declining U.S. dollar and rising inflation. Historically, gold has served as a hedge against both of these scenarios. With rising inflation, gold typically appreciates. When investors realize that their money is losing value, they will start positioning their investments in a hard asset that has traditionally maintained its value. The 1970s present a prime example of rising gold prices in the midst of rising inflation.ï»¿ï»¿
The reason gold benefits from a declining U.S. dollar is because gold is priced in U.S. dollars globally. There are two reasons for this relationship. First, investors who are looking at buying gold must sell their U.S. dollars to make this transaction. This ultimately drives the U.S. dollar lower as global investors seek to diversify out of the dollar. The second reason has to do with the fact that a weakening dollar makes gold cheaper for investors who hold other currencies. This results in greater demand from investors who hold currencies that have appreciated relative to the U.S. dollar.
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Is Gold A Good Investment
If youre looking to strike it rich with a modern-day gold rush, youre probably in the wrong place. Over the past five years, golds price increased by approximately 36% while the S& P 500 increased by 104% during that same period. So why all the hype?
That said, gold prices can be very volatile, meaning gold isnt an entirely safe investment. In fact, you can easily craft a well-diversified investment portfolio without gold entirely.
But if you want some of that golden gleam in your investment account, aim for it to occupy only a small percentage of your investing dollars.
You Can Buy Gold But Should You
Despite its age-old allure, gold isnt always the strong investment that movies and TV shows may have led you to believe.
I advise all of my clients to stay away from investing in gold, says Smith. Gold is a speculative investment and has a very poor long-term performance record. For individuals that still move forward on purchasing gold, buying gold in the form of a tradable security is a much easier and cheaper way of incorporating it into a portfolio.
I advise all of my clients to stay away from investing in gold. Gold is a speculative investment and has a very poor long-term performance record.
But while hes clear that he doesnt think investing in gold is a good idea, Smith does acknowledge the draw the physical metal can have. Theres something comforting about being able to touch what you own. You dont get that if you own a part of Johnson & Johnson.
Greg Young, a CFP and founder of Ahead Full Wealth Management in North Kingstown, Rhode Island, agrees. People like gold because its so easy to understand, he says. But anytime someone insists on a specific asset, there is an underlying emotional rationale.
About the author:Alana Benson is an investing writer who covers socially responsible and ESG investing, financial advice and beginner investing topics. Her work has appeared in The New York Times, The Washington Post, MSN, Yahoo Finance, MarketWatch and others.Read more
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What Is The Spot Price
The spot price of gold is the market price of one ounce. The price is quoted in troy ounces but can be converted into other amounts. The price per ounce is the same globally as most markets use live gold prices listed in U.S. dollars. The spot price is constantly changing, making it crucial for investors to remain updated on market conditions and news.
By studying the gold chart starting with a long-term history that goes back at least 100 years, investors can better understand what causes fluctuations in the price. The price of gold remained somewhat stagnant until the 1970s. It took off in a long uptrend, underpinned by rising inflation due to skyrocketing crude oil prices.
During the energy crisis and the resulting economic downturn of the 1970s, Americans experienced the OPEC oil embargo of 1973, where oil prices jumped 350%, and inflation rippled through the economy. Consumers conserved energy, cars got smaller, and entrepreneurs worked on solutions although the economic crises got worse.
After topping out at $2,420 an ounce in February 1980, it turned lower near $800 in the mid-1980s in response to Federal Reserve monetary policy. As of May 2022, gold is trading at $1,882 per ounce.
How Much Do I Need To Invest In Gold
You might have the idea that every gold investor rents a 10 ft. vault, filling it to the brim with blocks of gold and priceless jewelry. Scrooge McDuck might do this from time to time, but in real life it doesnt happen too often. You can save and invest in gold and silver at a much earlier age than you think. Well show you how the room filled with 400 oz gold ingots is more of a Hollywood scenario than a reality. And thats a big plus. When it comes to how much do I need to invest in gold, knowing that you can keep a lot of wealth in a small physical quantity of gold means you don’t need to worry as much about storage.
Gold investing isnt just for the 1%Though it might seem like gold investment is only for the 1% percent, the truth is that its affordable for anyone with a little savings at their disposal. Gold bars are one of the most affordable way to invest in gold. Unlike gold coins slightly limited in size and are more expensive per ounce gold bars are broken down into cost-effective segments.
That fits right in line with investment strategy from Stanley Drukenmiller, the multi-billion dollar hedge fund investor who suggests you should get out of the stock market and invest in gold. It has worked for him, and it can work for you!
They do not include manufacture, packaging, shipping, and insurance to get those bars to you. Just remember that when the big banks trade metal, they are trading numbers on computer screens and no metal actually moves.
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Where Does The Demand For Gold Come From
Gold is a safe-haven investment, meaning it should hold its value if paper currencies become worthless. Around 40% of the demand for gold is investment-based and includes gold coins, gold bullion, gold bars, and gold medals. Another 50% of pure gold demand comes from the jewelry industry, which maintains demand for other precious metals and stones.
The remaining 10% of demand for gold comes from various industries. Dental work can require gold, although this demand is slowly fading with the introduction of tooth-colored composites. Gold is a good conductor of electricity, so some electronics also use gold in the manufacturing process.
How Much Gold And Silver Should I Buy For My Portfolio
Jeff Clark, Senior Analyst, GoldSilver
How much of your portfolio should be in gold or silver? What percent of your portfolio should they comprise? And should you buy more of one metal than the other?
These are important questions. Buy too little and they may not make a material difference to your portfolio. Imagine the sick feeling in your gut if, during a crisis, you realize you didnt buy enough bullion to withstand it . Buy too much and your portfolio is negatively impacted if prices go nowhere or fall.
To answer this question effectively, there are some practical guidelines to consider. And since every persons circumstances are different, this article will help you develop a custom-tailored strategy suitable to your goals and risk tolerance.
Here are three key questions to ask yourself, along with a bonus question. Answer them and youll soon have a bullion strategy ideal for your personal situation
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Why Investors Like Gold
Gold has a proven track record for returns, liquidity, and low correlations, making it a highly effective diversifier, says Juan Carlos Artigas, director of investment research at the World Gold Council.
These qualities are especially important for investors:
- Returns: Gold has outperformed stocks and bonds over certain stretches, though it doesnt always beat them.
- Liquidity: If youre buying certain kinds of gold-based assets, you can readily convert them to cash.
- Low correlations: Gold often performs differently from stocks and bonds, meaning when they go up, gold may go down or vice versa.
In addition, gold offers other potential advantages:
- Diversification: Because gold is generally not highly correlated to other assets, it can help diversify portfolios, meaning the overall portfolio is less volatile.
- Defensive store of value: Investors often retreat to gold when they perceive threats to the economy, making it a defensive investment.
Those are a few of the major benefits of gold, but the investment like all investments is not without risks and drawbacks.
While gold performs well sometimes, its not always clear when to purchase it. Since gold by itself doesnt produce cash flow, its difficult to determine when its cheap. Thats not the case with stocks, where there are clearer signals based on the companys earnings.
Always Store Outside The Banking System
Physical gold is the antidote to the current system. The current banking system is based on credit, paper, and computer digits. The crisis that we are expecting the reason so many people are buying gold to protect themselves will be a huge banking crisis. Therefore, if you decide to purchase physical gold, its only logical to store it outside of that banking system.
Property rights in the banking system are of a temporary nature. Banks in the past have confiscated physical gold and cash, and there is always the possibility of a bail-in where all assets will undoubtedly be confiscated.
Some might argue that you could have a safe deposit box, but most of the time those are not insured. Besides, during harsh crises in the past, the bank was either closed or didnt have the amount of gold they claimed to have.
This problem started back in the 1980s when banks brought mathematicians into the system who argued that they didnt need all the gold on hand. They surmised that banks probably only needed 25% on hand. So, banks began to lien out or even sell 75% of their gold. Some invested it into government bonds where they received a guaranteed return on the investment. Little by little, much of the gold in the banking system disappeared.
The bottom line: dont put your gold in the banks. You dont want to take that risk.
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Only The Most Liquid Coins And Bars
You want to get as much gold for cash as possible. The main rule is to build up your liquid gold and silver stock. This means you should invest in legal tender coins such as the Maple Leaf, the Austrian Philharmonic, or the Australian Nugget. The main reason is that you dont want to run around with a kilo bar in a harsh crisis. Just make sure they are a legal tender and that they have a low fabrication fee.
For example, lets assume that you buy a maple leaf the coin from the Canadian mint. When you buy, the price of the physical ounce of gold should be as close as possible to the paper spot price of gold. That is always the underlying way you calculate the value of an ounce of gold.
Then, on top of that, you have to pay the fabrication fee and then you pay a brokerage fee for all the work the dealer has to do before you can get it delivered to you in person.
Whether you buy a gold coin like the Maple Leaf or the Austrian Philharmonic or the Australian Nugget , if you can buy them directly in a shop or an online store, make sure that you dont pay more than 5-6%. It really depends on the setup, but that is the general price range. As soon as you are happy with your stock of smaller domination coins, you can move up to bigger formats.
Question #: How Much Do I Need To Support My Expenses
Another practical way to determine how much bullion you may want is to match it up with your expenses.
What if you someday needed to sell some of your holdings to support your household? Unemployment and high inflation are just a couple reasons one might need to use their bullion to meet their monthly expenses.
This table shows how much gold youd need on a monthly basis, depending on your expenses and how long you might need it to supplement your finances.
If you need to supplement your monthly income by $1,000, for example, and that need would last for two years, youd want to have 14 ounces of gold. As the price rises youd need fewer ounces .
What about silver? Heres how many silver ounces youd need, depending on your expenses and how long youd need to use it.
Again youd need fewer ounces as the silver price rises. Keep in mind, however, that if you own both gold and silver, the amount of each youd need would be lower.
Look at your expenses, and how long you might need to supplement them, and youll gain some insight into how many ounces you might want to own.
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Bonus Question: Should I Buy More Gold Or More Silver
Physical gold and silver share many of the same characteristics. Theyre tangible assets you can hold in your hand are portable are highly liquid and can be sold almost anywhere in the world.
However, each has distinct advantages over the other. See how their differences might help you determine how much of each you want.
Perhaps the two biggest factors to keep in mind is that first, the silver price is more volatile. Which means you stand to earn more profit in a precious metals bull market than gold, but lose more in a bear market.
And second, silver takes up a LOT more space. So if you plan to buy a lot, youll probably need to keep the bulk of it in a professional storage account. Its just not practical, or safe, to keep a lot of silver in the house.
The History Behind The Precious Metal
For thousands of years, countries and civilizations worldwide recognized the precious nature of gold. More recently, the United States recognized it as the standard for the U.S. dollar, which is known as the “Gold Standard.” The Gold Standard Act was enacted by President William McKinley and passed on March 14, 1900. This act established gold as the only metal for redeeming paper currency. At the time, it set the value of the metal at $20.67 an ounce.
However, it was abandoned in 1913 when Congress created the Federal Reserve to stabilize gold and currency values in the United States. The U.S. and European countries suspended the gold standard to allow them to print money to pay for their military involvement in World War I. Since then, the value of gold has continued to rise as investors look to it for stability during uncertain economies. Mutual funds, ETFs, and IRAshave become increasingly popular.
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