Since 2020, the U.S. dollar has depreciated more than 20 percent in terms of purchasing power. This is thought to be the result of the generosity of monetary and fiscal programs that sent waves of trillions in the form of stimulus, forgivable loans, debt forbearance, and other benefits provided in the CARES Act passed in response to the pandemic. Let’s examine the advantages and disadvantages associated with investing in gold.
Advantages
- Portfolio diversification: Gold can diversify your investment portfolio, reducing risk by balancing out more volatile assets like stocks. Gold prices aren’t closely correlated with price moves among stocks and bonds, and many financial advisors will recommend your portfolio can be dedicated to gold in a small amount, say 5–10 percent.
- Inflation hedge: Gold often retains its value during inflationary periods, making it a good hedge against rising prices. Gold is considered a long-term hedge against inflation, but its short-term performance can be less convincing. Precious metals like gold and silver are often seen as a hedge against inflation because they preserve their purchasing power over time. However, it’s important to consider the holding period and individual investment goals when using gold as an inflation hedge.
- Safe haven: During economic downturns or geopolitical instability, gold is seen as a safe-haven asset by many investors and financial experts. A safe-haven asset is an investment that is expected to retain or increase its value during times of market turmoil or economic uncertainty. Gold has been used as a store of value for thousands of years, and is universally recognized as a source for exchange. Unlike fiat currency, which is not backed by any tangible asset and is only accepted in certain countries, gold cannot be devalued by overprinting.
- Limited supply: The finite supply of gold can help maintain its value over time. Gold is a limited natural resource. At some point, the world’s supply of new gold could conceivably almost run out. There also is a relatively limited supply of gold compared to fiat currencies. The latest World Gold Council report shows a 4 percent decline in the total gold supply. Mine production also slid 4 percent, to 3,401 tons, including just 896 tons in the latest quarter, a five-year quarterly low.
- Historical track record: Gold has been a store of value for centuries, providing a sense of security and stability. While gold has not outperformed other investments such as stocks, it has at least kept up with inflation.
Disadvantages
- No income generation: Unlike stocks or bonds, gold does not generate dividends or interest. While gold is often seen as a store of value, the price of gold can still be volatile, especially in the short term. It’s also essential that new investors understand gold isn’t an income-producing asset. It doesn’t generate dividends or interest, so you’re strictly relying on the price appreciation for your returns.
- Price volatility: The price of gold can be quite volatile, influenced by various factors including market sentiment and geopolitical events. Although the metal has proven its capacity to maintain its value over time, the price of gold is often volatile over the short term. There are many factors that influence the price of the metal.
- Storage and insurance costs: Physical gold requires secure storage and insurance, which can add to the cost of investment. Gold storage costs may add an extra expense, but they can often be worth paying for. Investors want peace of mind knowing their investments are protected against theft and natural disaster. Options available for storing precious metals include bank safe deposit boxes, home safes, or secure depository facilities.
- Liquidity issues: While gold is generally considered liquid, selling physical gold can sometimes be less straightforward compared to other assets. Gold is not actually liquid in the physical state. It is a metal with a melting point of 1,064 degrees Celsius. However, in financial terms, gold is considered a highly liquid investment because it’s easy to buy and sell.
- Risk of counterfeits: There is a risk of purchasing fake gold, especially if not bought from reputable sources. Investing in fake gold schemes can have serious consequences, leading to significant financial losses for unsuspecting individuals. Scammers often employ sophisticated tactics to create the illusion of a legitimate investment opportunity, such as providing fabricated documents, promising unrealistic returns, and using persuasive sales techniques.
Different Gold Investment Options
There are several ways to invest in gold, each with its own advantages and considerations. Here are some of the most common options:1. Physical Gold
Bullion: This includes gold bars and coins. It’s a tangible asset that you can store yourself or in a secure facility.Jewelry: While not the most efficient investment due to high markups and craftsmanship costs, it can be a way to hold gold.
2. Gold Stocks
Investing in companies that mine or produce gold. This can be more volatile as it depends on the company’s performance and gold prices.3. Gold Funds
Exchange-traded funds (ETFs): These funds track the price of gold and can be traded like stocks. They offer a convenient way to invest in gold without needing to store it.4. Mutual Funds
These funds invest in a diversified portfolio of gold-related assets, including mining companies and physical gold.5. Gold Futures and Options
These are contracts to buy or sell gold at a future date at a predetermined price. They can be complex and are typically used by more experienced investors.6. Gold Certificates
These are issued by banks and represent ownership of a certain amount of gold. They offer a way to invest in gold without physically holding it.7. Digital Gold
Some platforms allow you to buy and hold gold digitally. This can be a convenient and cost-effective way to invest in gold.Summary
Gold is classified as an alternative asset—that is, an investment type that’s not stocks, bonds, or cash. Alternative assets can include other commodities such as silver and collectibles, paintings, wine, even coin collections, and are all in the broad sense considered part of your investment portfolio.“A small amount of gold can help in diversifying a portfolio,” according to Patrick Dinan, president of Fiduciary. Dinan says clients hold on average about 2 percent of gold in their portfolios, as it is viewed as a noncorrelated alternative asset.
Gold can be a prudent way to invest for the possibility of continuing decline in U.S. currency.
Remember, “ALL THAT GLITTERS IS NOT GOLD.”
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
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