Investing in properties or stocks are common avenues that most people venture into when they’re looking to diversify and grow their wealth. But there’s something quite alluring about investing in gold; you can almost see the bricks sparkle at the mere mention of the shiny, precious metal.
The reality is, if you’re looking to invest in gold, you have to know exactly what you’re investing in:
Gold is Old—A Brief History
Age often dictates an object’s worth. That ‘out-of-bounds’ wine bottle is so fine because of its loyalty to time. Untouched, uncorked and as valuable as ever.
And gold’s place in history is partly what makes it so seductive.
Gold took the form of currency as early as 560 B.C., when merchants wanted to create a standardized and easily transferable form of money in order to simplify trade. Gold then began to take off as a standard form of money; both Greek and Roman empires used the metal as a form of currency.
It wasn’t until 1066 that Great Britain began using precious metals as a form of currency. Back then, the pound, pence and shilling were all based on the amount of gold that they represented.
The United States government continued on with this gold tradition by establishing a bimetallic standard in 1792. This meant that every monetary unit in the United States 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 1913, the Federal Reserve was created and began to issue promissory notes that could be redeemed in gold. However, 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
So now that you know what you’re investing in—a precious metal with historical significance—there are some important factors you must consider before chasing the “treasure.”
The Importance of Gold
Although gold does not support any worldwide currency, it still plays a vital role in the global economy. In fact, the reserve balance sheets of central banks and organizations such as the International Monetary Fund reiterate this very point. Such organizations are responsible for holding approximately one-fifth of the world’s supply of “above-ground” gold, with many central banks striving to increase their gold reserves.
Metal Beats Paper
One of the main reasons an investment in gold may be considered a shrewd move is because paper-denominated currencies have not successfully preserved wealth in comparison to gold.
For example, in the early 1970’s, one ounce of gold equaled $35 (gold is priced in USD globally). So, let’s say, at that time, you held an ounce of gold in one hand and in the other hand you had $35 in paper money. With that, you could use the contents in each hand to purchase, say, a coat (using the ounce of gold and the $35).
Let’s return to the time-machine and transport ourselves back to the future. You still have both the gold and $35 in each hand. However, when you try purchasing the equivalent of that coat in today’s shop, you’ll find that your $35 has decreased in value, whereas the value of the gold is more than enough to make the purchase.
So, when you decide to put your money in gold, in a sense, what you are actually doing is preserving your paper value in metal form.
Gold vs. Inflation
Rising commodity prices mean rising inflation. The volatility of the economic market is why your investment in gold is a sound way of preserving your wealth.
Historically, gold has served as a hedge against inflation and a declining US dollar. When inflation rises, gold typically appreciates. When seasoned investors realize that their money is losing value, they begin to position their investments in a hard asset that has traditionally maintained its value.
Because gold is priced in US dollars, the metal benefits immensely from the declining currency. There are two reasons for this:
- Investors such as central banks that are looking to buy gold must first sell the US dollar in order to complete the purchase. This ultimately weakens the currency as global investors seek to diversify out of the dollar.
- Secondly, a weakened US dollar makes gold cheaper for investors who hold other currencies. And those who hold a currency that has appreciated relative to the dollar will create a greater demand for the highly sought after metal.
Be sure to keep the “gold vs. inflation” battle in mind if you are having doubts about investing. Remember, as the economic markets crash, rise and act indifferently, gold invariably stands its ground.
Where Is Gold Sold?
Unlike several hundred years ago, today you can choose from a range of options in order to reap the benefits of gold’s properties:
- Gold Coins
- Gold Miners
- Gold Futures
- Gold Mutual Funds
- Gold Jewelry
- Gold Bullion
- Gold ETFs
Make sure you thoroughly research the best option for you, and list the pros and cons of each. Don’t rule out seeking professional advice. After all, it’s your investment and you need to make wise decisions.
Lower Your Expectations. Raise Your Patience
If you’re expecting to see massive success in your gold investment in a matter of days or weeks, then you’ve been ill advised. It’s an investment; one that needs to be treated with the same attentiveness as other investments.
Many investors jump from the latest “get-rich-quick” investment fad to the next when their current investment becomes stagnant. Don’t do as others do. Any investment requires you to be patient and to invest your time.
And investing in gold demands patience! When you invest, it is highly recommended that you stay for the long haul.
Understanding ETFs and Physical Metals
One of the fundamental errors that new investors (to precious metals) make is that they believe that owning an Exchange Traded Fund (ETF) that invests in gold (such as GLD) is the same as owning the physical gold itself.
When you’re the owner of a gold ETF you only really own a piece of paper (a promissory note) showing how many shares of the fund you own; however the actual physical gold is not in your possession.
Essentially, the ETF owns the gold, whereas you own a promise from the fund managers to pay back the value of the shares you have purchased in the ETF.
The primary disadvantages of a gold ETF are:
- The ETF certificate that you own is not universally traded on the world markets, nor is it readily exchangeable for currency.
- You have to trust someone else to establish the value of the gold owned by the ETF.
- You have to rely on the fund managers to have enough physical gold to cover your investment.
When you possess the physical gold:
- The value of your investment is determined by the market, and not by a fund manager.
- You don’t have to rely on another party to tell you gold’s value.
- There will always be some value to your possession. Although the value of gold may fluctuate, precious metals are rare elements that cannot be manufactured; hence some value will always be attached.
Prepare Before You Invest
In order to be one of the “successful” investors, you’ve got to prepare yourself with as much research and knowledge as possible so you can make an educated decision. It’s extremely important that you’re not reactive in your decision-making. Instead, be proactive. Pre-plan your moves. And, this should apply to all investments and business decisions you make.
It’s easy to become overwhelmed, especially with so much information out there. But, relax. Educate yourself first, get the specialized knowledge you need and then invest. Markets are, and always will be, volatile.