You always heard about mutual funds, stocks, cryptocurrencies etc. But do you know that gold is also a must know for investment?
History of gold and its value
Gold is well known and recognized throughout the world for its value and rich history, which had been used as currency and kept as treasures. People see gold as a way to hold and pass on the wealth to the next generation. In the late 1800s, gold gained its role in contemporary finance. Many countries have adopted the gold standard, which is to tie the value of their fiat currency with the price of gold. The price of gold remained relatively stagnant until the 2008 financial crisis. The price rose since then from USD660/oz or USD25/gram to today at USD 1800/oz or USD56/gram.
Why should you invest in gold?
1. Wealth Preservation
Gold has been trusted by many investors for its quality of keeping value. As precious metal, gold does not erode and can be melted to make coins, bullion or jewelleries. Let’s look at the comparison of owning a $50 note vs a $50 worth of gold in the 1990s. Gold has gone up in value by 22 times! Whereas the $50 note has not increased much, and with inflation factor, we cannot buy as much as we could have in the 1990s.
2. Hedging Instrument
Gold prices often appreciate alongside a depreciating dollar and rising inflation, and vice versa. This happens when fiat currency loses its purchasing power to inflation, gold tends to be the alternative asset that can deliver the value. For this reason, investors may look to buy gold as a hedging instrument when they are facing losses in investment.
Always remember:
Do not put all eggs in the same basket,
You need other asset to diversify and hedge against losses
3. Portfolio Diversification
A balanced portfolio includes diversification assets like gold or silver. They are commonly negatively correlated to the market. When the market performs, gold prices will go down; but when the market crashes, gold prices will soar.
The 1970s was great for gold, but terrible for stocks.
From Investopedia
The 1980s and 1990s were wonderful for stocks, but horrible for gold.
2008 saw stocks drop substantially as consumers migrated to gold.
4. Safe Heaven
Unlike fiat currency, gold is not directly impacted by inflation or interest rate. Neither can it be printed or counterfeited. Gold is a finite resource that has limited supply and maintained its value over time. Over time, reduction in the supply of gold increases gold prices. It has also proven that it acts as an insurance when the market is down.
How to invest in gold
1. Gold bullion and coins
The traditional and popular way for investors to invest in gold is by buying physical gold, coming in the form of bullion or coins. Gold bullion is the physical metal that can be reshaped into gold bars, gold pieces. On top of that, investors can choose to collect gold jewellery. However, the price is often a mark-up from any other gold format, due to the workmanship and labor cost factor into it.
The downside of having physical gold is that taking up spaces and with the risk of loss or theft. Once you lose it, you will be losing the entire value of the asset.
2. Paper gold/ ETF
Another option is paper gold. Paper gold meaning you are holding a piece of paper acting as a substitute for the physical gold. Physical gold comes with potential theft, and other hidden costs. It is no surprise that buying gold from financial institutions or banks has become a popular choice. You can still buy and sell gold through all these regulated parties, and some offer to withdraw as physical gold (subject to minimum requirement, example 100g)
Exchange-traded funds (ETF) offer exposure to the gold market. It works the same way as a stocks ETF. Gold ETF tracks the movement of commodity markets, and prices fluctuate accordingly. An ETF is considered a more liquid asset compared to owning physical gold.
3. Gold related stocks
The alternative option is by investing in stocks, particularly on gold-related companies (be it the mining company, jewellery company). This is a riskier way than gold, as you have to take into account the company performance (separate from solely on gold prices). The fluctuation of gold related stocks would be higher than getting gold (physical or paper gold)
The Bottom Line
Gold should be part of the investment portfolio, as it provides safe heaven and insurance to your other types of assets. When the financial market is down, people will start losing trust in the dollar and switch the need for gold as an alternative currency. The finite supply and increased demand in gold has made gold one of the most sought after assets today. Even though the price might fluctuate in the short term, but in the long run, investors are anticipating it to be bullish.