About the possibilities of investing in gold
For many, gold equals security and with at the same time a fully liquid, yet profitable investment. In other words, with a completely perfect form of investment for everyone.
Gold as an investment can be part of your investment basket. However, it is useful to know what to look for, what are the characteristics of this form of investment.
Gold, as a custodian of value and thus an investment, can be observed for millennia. This is basically because it’s not easy to get, so you can’t say you’re mining as a simple afternoon program. It is not easy to mine, so that it the reason why it is able to keep its value.
Luckily for humanity, it’s not an alloy, so you didn’t have to wait for someone to invent the right alloy ratio to get the gold.
The value of gold
The value of gold is basically determined by the demand for it and the supply that serves it.
It is most sought after by the jewelry industry, technology companies, investors and central banks. Their demand is largely met by mining as well as recycled gold. To a very small extent, gold offered for sale by investors and central banks also plays a role.
The price of it is determined by who how much is willing to pay for it at that time. Thus, changes in supply and demand create a return.
The yield of gold
Unlike companies, it does not produce anything, as I mentioned, you can get a return by increasing its price. Keeping gold back home will not pay you interest like bonds, nor will it give you dividends like stocks. This property of investment gold is exactly the same as other precious metals (eg silver) and industrial metals for investment purposes.
The price of gold has shown a significant shift in recent decades, yet no future can be inferred from past yields. This is because most investors buy gold for fear of a possible crisis and want to protect their money against inflation.
Gold as a custodian
Most investors mostly buy gold when the stability of the global financial situation is shaken. They seek security, so it’s not really the return that drives them, it’s more about securing their existing assets.
Many say that it retains its value. It depends on what you mean by value:
- if purchasing power: then maybe, but more on that later.
- if the numerical amount: then not at all.
When investors believe that another class of assets will bring them more profit, they sell some of the gold. And increased supply lowers prices.
When people are confident in the performance of the economy, the stock market strengthens and gold weakens.
In the image above, the price of gold is marked in orange and the US dollar in blue.
The first rise in the price of gold still shows the uncertainty following the mortgage crisis. The subsequent fall was caused by the strengthening of the economy. Then came a rise again, when the breezes of a possible crisis were already being announced in the news, and the quarantine and uncertainty caused by the corona virus also strengthened the desire for security.
Gold and inflation
Physical gold and the investments based on it better protect your money against inflation. Although it does not track 100% money deterioration, for a given amount (e.g. 1 ounce) of gold you can still buy a similar amount of product today as, say, 50 years ago. The same can no longer be said about cash.
The reason for this is simple: central banks can print more money at any time, thereby raising inflation. However, no one can produce new gold. They can mine, but it has a cost that is significantly higher compared to rewriting a number in the registry. (Today, most money printing is digital money, not physical money.)
Gold and deflation
Interestingly, even in the case of deflation, gold retains its value much better than anything else. This is because in a period of deflation, investors make a loss on many investments due to declining sales. Accordingly, they are looking for a device that is unlikely to go bankrupt. Thus, in such a period, the demand for the precious metal increases, which in the case of a declining price level may not result in a visible increase, but may not mean a decrease. That is, the two effects balance each other.
How do you use gold to invest?
Using gold for diversification
It is great for diversifying your investment. Diversification means investing the money at your disposal in different investment vehicles, not just in one direction. Because these devices respond differently to the same effects, their performance will be different. This will make your return more balanced.
The price of this asset shows a very low correlation with other asset classes. This means that it typically does not move with them in the same direction. While it doesn’t rise when, say, stocks soar, it doesn’t even fall with them.
Thus, it can be a good solution for diversification. That is, to reduce your risk while your expected return does not decrease proportionately.
Depending on your own opportunities, goals, and the inflationary or deflationary environment, it is advisable to keep 5-15% in this kind of metal.
What can’t you use gold for?
Before we move on, let’s get a little clarification. Buying gold is storing your money, not necessarily investing. Although we have seen on the graph that the price will rise over time as well as due to market effects, so you have the opportunity to make a profit even if you bought a gold bar. Unlike traditional forms of investment, you can’t really calculate this. There may be a lot of time between the purchase and the time when it is really worth selling your investment.
In contrast to a company where it can be said from its numbers so far that its paper is overvalued or just undervalued, there is really no possibility of that for gold. So while I’m going to use the word investment, know that “vault” or just “diversification” would be more appropriate.
Therefore, you cannot use gold to invest a significant portion of your wealth in the hope of making a profit. Because it’s not suitable for that.
How can you invest in gold?
Many people, especially in India, buy gold jewelry because of its value. Then weight and purity determine the price. It’s hard to make a real profit on it because you have to pay for the machining here as well.
Physical gold (Gold coin, gold bar)
Here purity no longer plays a role. I mean, if you bought it from a trusted place. It is only the weight that can make a difference. The advantage is that you can store it back home, and if a disaster happens, you have to leave everything behind, you can still take it with you.
The downside is that in the case of a coin, you have to pay for the machining (i.e., to look like a coin), and the gold bar is pretty hard to sell and move. I mean, at whole. Where appropriate, storage and custody can be particularly costly.
You can reach a lot through the ETF. Not just bonds and stocks, but even gold.
You then buy a security that represents value. In this case, its value is the physical metal behind it. In a legal sense, it is not the precious metal that belongs to you, but the investment fund, but you are the owner of the fund in proportion to the investment units purchased. So indirectly, you have this asset, but you don’t have to worry about guarding it.
In addition to gold ETFs, gold ETCs are available. These work similarly to a bond that has gold collateral. Although most gold ETCs are 100% covered by it, counterparty risk is increased here.
However, a passively managed investment fund is one of the cheapest forms of investment.
Gold Miner Mutual Fund
Here, companies that deal in gold show up, so you don’t have to stay with physical gold to profit from the gold itself. This type of mutual fund is usually actively managed, so it is advisable to look closely at how a particular company operates.
Then you don’t specifically benefit from physical gold. Its price is just one factor that affects the performance of companies. The advantage of an investment fund made up of the securities of gold companies is that it contains shares of many companies. Accordingly, your risk is lower. If something happens to one and the value of that one becomes zero, the value of your investment decreases a little at most. Provided the other company in the fund has not bought it below price. Because then this is just right for you.
Shares of gold mining companies
The value of a gold mine follows the value of gold. (Not in vain gold mine ). So by choosing this solution, you can benefit from the movement of the gold price and, since we are talking about stocks, also from the performance of companies. So you can win from two directions if you choose well.
Individual stocks always require caution. The share price of gold mining companies is affected by the same as the shares of any other company. So before you buy a stock, think about whether you are doing well with that company.
This solution is not for everyone, as a gold mine has a high risk of some external impact (even a natural disaster) making production impossible. If that happens, there will not be too much of your profit.
Structured products, derivatives
There is no real precious metal behind them, but their value comes from the price of another gold-related product. Because their risk is high, they are not suitable for the average investor.
Because structured products are fundamentally obligations, there is a risk that they will not fulfill the obligation they have made. That is, the level of partner risk is high compared to the others.
- How much would you keep your own investment in this asset? Why do you think is it good?
- Which of the gold investments would you choose for yourself?
- In what period of time do you think it is advisable to think about investing in gold?
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