Why Investing In Precious Metals Is A Bad Idea
6 Minute Read | September 27, 2021
When the world seems like its going crazy and the news cycle is filled with a constant stream of bad news, you might be tempted to make some dumb financial decisions like go all in for a better bartering system based on commodities like gold or silver. But before you invest all your money into precious metals, lets get the facts straight.
Gold Futures And Options
A futures contract gives the holder the right to buy a specific amount of gold at a future date and price. Options contracts also enable the holder to buy or sell shares of a gold ETF or gold mining stock at a specific price and date. The contracts move with the underlying price of gold or the shares of the gold-related equity, giving the investor exposure to gold without owning the underlying investment.
One downside to gold futures and options contracts is leverage. Investors don’t need to put the full value down at purchase. The leverage can increase an investor’s gains but also can cause losses, especially if the holder doesn’t have enough capital to satisfy the purchase. Insufficient capital can force investors to sell at a loss instead of purchasing to hold for a potential future recovery.
What Is A Gold Investment
While investing in gold as a physical asset is an option for many investors, not all investors have access to investment grade gold or can afford the significant overhead of storage, maintenance, insurance, and any other required administrative and legal tasks. While anyone can hypothetically buy gold bullion and purchase a safe to store it in, the best ways to gain exposure to gold are through gold stocks and gold exchange-traded funds .
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Gold stocks refer to companies that deal with gold as a commodity. The best gold stocks are gold mining companies or other precious metals companies with significant involvement in the gold supply chain.
Other gold stocks include companies exploring gold deposits to exploit, gold refinement companies, gold jewelry companies, or any company exposed to gold as a commodity. While gold stocks can be a good investment, the price of gold stocks is less correlated with the spot price of gold since gold is not the underlying asset.
Investors who want to gain exposure to gold as an asset without having to deal with it physically can do so by buying shares of a gold exchange-traded fund . Gold ETFs are managed funds where gold is the underlying asset, which means that each share of a gold ETF is a security that represents the value of gold minus the cost of storing it somewhere else.
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Why Invest In Gold
There are several benefits from buying gold as an investment. For one thing, its been a trusted asset for wealth preservation. Tied to that is its ability to hedge against inflation, as gold prices have often gone up alongside a general rise in prices and losses in the U.S. dollars value.
Gold has also been regarded as a safe haven during times of economic uncertainty. Unlike currencies, gold isnt directly affected by interest rate decisions. And while central banks can increase the amount of money by printing more of it, which lowers the value of currencies, the amount of gold is limited. That scarcity has allowed gold to maintain its value over time, which adds to its strength as an insurance policy during adverse economic events.
Gold Vs Stocks And Inflation
Before 1971, there was little point investing in gold as the price was fixed. However, during the 1970s gold became a legitimate asset class. During this period, US inflation spiked to above 14%, and gold quickly became established as an inflation hedge. By 1980 the price had risen to over $2200, though it weakened substantially over the next two decades when inflation declined, and the stock market performed well.
Since the 1970s gold returns have often had a negative correlation with stock market returns. Owning gold is therefore viewed as way to hedge against market volatility. Investing in gold is generally effective when there is speculation that central banks will increase the money supply, or when other factors may lead to hyperinflation.
A gold investment will also often perform well during a financial crisis, when geopolitical tension increases, or when war breaks out. The oil price is strongly associated with inflation. Any hostility close to oil producing nations notably in the Middle East can lead to interruption of oil supply. This can result in higher oil prices and later to inflation. This is why the gold price often rises when geo-political tension rises.
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Alternatives To Gold Investment
Gold is not the only precious metal you can use to hedge against volatility and inflation. Some investors actually believe silver is a better investment because there is more industrial demand for the metal. Typically, gold is slightly better volatility hedge, while both silver and gold are effective inflation hedges.
Hedge funds like LEHNER INVESTMENTS Data Intelligence Fund that employ long / short and market neutral investment strategies can also be used to hedge a portfolio against a . Other alternative asset classes like real estate and private equity also have a low correlation with the stock market and bonds. These can also be used to hedge a portfolio over the long term.
History Of Gold Investment
Since the stock markets began, gold has gained a reputation to have a negative correlation to stocks and a positive correlation when compared to inflation. However, goldâs history as a financial asset and store of value began long before this.
Gold coins were minted and used as currency as far back as 550BC, but gold was known as a sign of wealth long before its use as a currency. Treasures containing gold have been discovered from as early as 4000BC, so the precious metal has been notorious for its relevance to power and wealth for many millennia.
However, it was not until the late 1800s when gold gained its value in contemporary finance. The majority of nations adopted the gold standard, which involves fixing the value of their currency to the price of gold. Since, the gold standard has been dropped and readopted in many countries until it was finally replaced by freely floating fiat currenciesâ in 1971.
The price of goldâ remained relatively stagnant until the 2008 financial crisis, when the price of gold rose from around Â£15 to Â£30 a gram in the following years. This spike in price was in response to the adoption of quantitative easing by central banks. The justification of goldâs appreciation in value follows the general logic that QE creates inflation, and gold prices generally rise alongside inflation.
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How Much Gold Can You Own
There aren’t any limits on how much gold you can own. Some 244,000 metric tons of gold have been discovered in the world so far. That includes 187,000 metric tons of mined gold and 57,000 metric tons of underground reserves. If you had an infinite amount of money, you could theoretically try to convince all of the owners of all of that gold to sell it to you.
You Should Invest In Gold If
Gold may be right for you if youre an investor with tens of thousands of dollars or more to invest in the asset class and you want to add stability to your portfolio or are looking for a store of value during tough economic times. Gold investments are better for investors who:
- Have a Few Thousand Dollars to Invest. Gold is a highly valuable asset. Because commodities are cheaper in higher quantities and tend to make up less than 10% of a well-diversified investment portfolio, its important to have enough money in your portfolio to purchase a couple of ounces or more at a time. At todays prices, a pair of one-ounce gold bars requires about $3,500.
- Want to Hedge Against Inflation. Gold has historically grown in value at a rate faster than the U.S. dollar has lost value to inflation. As a result, the yellow metal makes a great hedge against inflation-related risks.
- Want Stability in Your Portfolio. As an asset known for generating stable growth, gold is a great option for those looking to add stability to their portfolio in order to balance out the risks associated with other investments.
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Modern Bullion Coins And Bars
Modern bullion coins allow investors to own investment-grade gold legal tender coins at a small premium to the spot price of gold as quoted on the markets. The value of bullion coins and bars is determined almost solely by the price of gold, and thus follows the bullion price.
Gold, silver, and platinum are all available in the form of bullion coins, minted in the UK, the US, in Canada, South Africa, Austria, Australia, China and other countries. Most bullion coins are minted in 1/10oz, 1/4oz, 1/2oz & 1oz form . However, one-ounce gold bullion coins such as Krugerrands or Britannias are by far the most popular for both small investors and high-net-worth individuals who see the advantages of owning legal tender bullion coins, either in their possession or in depositories, and recognise the advantages of the divisibility afforded by them.
Buying investment-grade gold bullion for investment is stamp-duty free and tax free in the UK and EU due to the EU Gold Directive of 2000.
We have compiled a directory of leading gold brokers where you can buy gold bullion, coins and bars online, over the phone or even in branch: How and where to buy gold coins and bars.
Why Buy Gold 11 Reasons To Invest In Physical Gold Bullion
Jeff Clark, Senior Precious Metals Analyst, GoldSilver
Is gold a good investment? Why should you own it?
Its natural and even prudent for an investor to wonder if a particular asset is a good investment or not. Thats especially true for gold, since its an inert metal and doesnt earn any interest.
But the reasons for owning physical gold go beyond the possibility of its price rising. Gold bullion offers distinct advantages that simply cant be found in almost any other investment. These advantages give you power as an investor. And yes, one of these reasons is because the price is poised to rise significantly .
Lets first dispel with a common misconception about gold: it doesnt pay interest or dividends so is not a good investment. But gold isnt supposed to do that, and thats a GOOD thing
Owning gold means you dont have to worry about earnings reports, changes in dividend and interest payments, or unhappy shareholders. Its one of few assets where those factors are not present, freeing it up to do what it has done for thousands of years: store value for you.
An ounce of gold can buy a nice suit todayjust like it could hundreds of years ago, and even thousands of years ago . There are times when it will buy or less, but it has always come back to this equilibrium. This track record is unmatched by any other investment.
Here the top 11 reasons why every investor should buy some gold bullion, with emphasis on investment implications
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How Much Gold Should I Have In My Portfolio As Opposed To Silver
Choosing between gold and silver ultimately comes down to investor preference. Some investors will use technical analysis to determine whether gold or silver is a better investment at that point. Others prefer gold, no matter what’s happening with the market, due to its long history as a store of value. Another strategy is to invest in mining companies or metals sector ETFs that offer diversified exposure to many different kinds of metals.
How To Obtain Gold Mining License In Nigeria
To obtain a license for mining gold, there are currently two routes available for prospective raw gold mining investors into the mining sector.
==> Purchase of a pre-existing gold mining property from the original owner. After acquiring the property, you can apply for a business license from the Ministry of Solid Minerals Development.
==> Applying for the following mining rights.
1. Prospecting Right 2. Exclusive Prospecting Licence 3. Special Exclusive Prospecting Licence
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How To Invest In Physical Gold
Investing in physical gold can be challenging for investors more accustomed to trading stocks and bonds online. When it comes to physical gold, youll generally be interacting with dealers outside of traditional brokerages, and youll likely need to pay for storage and obtain insurance for your investment. The three main options to invest in physical gold are bullion, coins and jewelry.
Coronavirus And Gold’s Price
The price of gold since the coronavirus pandemic has further reinforced its utility as a hedge to the S& P 500. When the stock markets crashed, gold hit new highs not seen since 2012, with many analysts still predicting further gains. This is most likely a result of investors reallocating their wealth into gold, as it is known as a âsafe havenâ and a hedge to stock markets and financial uncertainty.
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Is Gold A Good Investment In 2021
Gold is one of the earliest traded assets, existing long before other markets like stocks and bonds. Gold tradingâ offers lots of opportunities for investors, but it is not without its downfalls. Join us while we cover why people invest in gold, how to invest in gold and review whether or not gold is a good investment in 2021.
Its Industrial Usage Is Limited
Gold has various uses in fields like electronics, medicine, and dentistry. But only about 10% of worldwide gold demand is driven by industrial production. As a result, gold is relatively insulated from a manufacturing recession, even though it’s not protected from a consumer recession where spending plummets. By contrast, more than half of silver mined worldwide is used for industry, which is why the white metal is more likely to move up and down with the stock market.
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Use Futures And Options To Invest In Gold
Of all the ways to invest in gold, the riskiest is trading futures or options contracts, a form of speculative investing. Futures and options are derivatives, meaning their value is based entirely on the price of an underlying asset.
A futures contract is an agreement to buy or sell a security for a set price on a certain date, regardless of the current market conditions. An options contract, meanwhile, is an agreement that gives you the option to buy or sell a security if it reaches a certain price on or before a certain date.
In order to invest in futures or options, you need an account at an online broker that offers these vehicles. Many online brokerages allow for trading in these securities, but they may require account holders to sign additional forms acknowledging the risk of investing in these derivatives.
Once youve established a brokerage account to trade options or futures, you can buy and sell them directly via the platform. Most platforms charge a commission for all options and futures trades that varies based on the number of contracts you buy or sell.
People who choose to invest in gold via options or futures contracts need to actively monitor their holdings so they can sell, roll over or exercise their options before they expire worthless. In addition, each of these options includes a certain degree of leverage, or debt, by default, so investors who overuse them and experience market losses can see their losses mount quickly.
How To Invest In Gold
You have various options for investing in gold. You can, for example, invest in physical gold by purchasing the aforementioned gold coins or gold bullion, as well as gold jewelry.
Again, you can also get invested in gold-focused stocks and ETFs.
If youre curious to get on the gold bandwagon but not sure where to start, Q.ai makes it simple. As your pocket-sized hedge fund, we have carefully curated a Precious Metals Kit as part of our Select Kits offerings you can add to your investment portfolio. Weve done this because, since 1977, the consumer price index has increased over 300 percent, but all four underlying metals in the Precious Metals Kit have appreciated in excess of it.
The Precious Metals Kit allows you to take advantage of this appreciation by shifting assets to precious metals that diversify equity market risk without risking the impact of inflation on holding cashespecially in a low-interest-rate environment.
Q.ais machine learning consistently rebalances a mix of four ETFs every week, including gold ETFs. Learn more about the kit here.
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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.