Updated: Sep 30, 2021
Throughout history, gold has been one of the most popular ways of storing value. Even with the onset of the digital economy, this view continues to prevail. Gold continues to be regarded as a hedge against inflation. In other words, as inflation increases and the purchasing capacity of the dollar decreases, a good majority of investors believe that precious metals like gold will hold steady and retain their purchasing power.
Although nearly half of the gold supply is used in some form of jewelry, investment use of gold is on the rise and should not be underestimated. Nearly 40% of the gold supply is used for investment purposes, whether it be an individual investment or a government entity. One of the other selling points of gold is its industrial use. However, its industrial is less than 10% of its overall use and represents a small fraction of its value in the marketplace. The metallurgical properties and corresponding industrial use of gold should not be the major factor in deciding on whether to invest in the yellow metal.
Investing in gold is different from other investments, in the fact that a good portion of gold’s value is derived from its comparison to competing investments. When investing in gold, the most important thing to consider is the opportunity cost when comparing it to other alternatives. With bonds, you generally receive interest payments that pay you coupon income every six months. Certain company stocks can also pay healthy dividends to generate an income. In both of these cases, your investment generates a positive cash flow while you hold the stock or the bond. With gold, there is no income to be generated while you hold it. This is major mark against gold and this factor can put downward pressure on the value of gold when investor sentiment shifts toward fixed income investments when interest rates rise. While this is a significant risk of owning gold, the inverse can also be true. In times of declining interest rates, or faltering faith in the US dollar, gold’s value can increase.
Looking at the historical value of gold, comparing its value to other fiat currencies (currencies whose price are determined by their government as opposed to other means) shows the how effective gold is as an inflation hedge. If the price of gold is made a standard, the values of the world’s largest currencies (the US dollar, British Pound, and Japanese Yen) all see devaluation over time.
Although the idea of investing in gold has not changed, one thing that has changed in the digital age is how to invest in gold. Traditional gold investing consisted of buying bullion and storing it or paying a fee for someone else to store it. While that is still common today, a popular new way to invest in gold is through exchange traded funds (ETFs). Below are some of the benefits of investing in gold through an ETF:
Easier to Purchase – In addition to the high cost to invest in gold bullion, there is the added cost of safely storing all the gold, which can be cumbersome and expensive. With an ETF, shares of Gold ETFs can be purchased like shares of company stock. The major cost associated with this approach would be the ETF’s management fees, which are below 0.5% for the larger funds that offer gold exposure.
Easier to Sell – When looking to sell gold bullion, you will need to show authenticity, pass purity tests, and absorb selling fees or mark downs. With an ETF, most major funds are frequently traded so that selling your shares will be nearly instantaneous, with quick access to your funds and minimal transaction costs.
Potential Risk Reduction – As previously mentioned, the cost of investing in physical gold is much more than just the initial purchase price. Physical gold has the risk of being stolen, and an insurance policy to cover this risk will eat into the value of your investment.
Like any other investment, it is important to recognize that while gold might be the right investment for you, it should not be the only investment. The key to successful investing is structuring a well balanced, diversified portfolio, and holding gold as a portion of that diversified portfolio can be a reasonable approach. If gold is something you have considered investing in or if you have questions about its use in your portfolio, click the button below to set up a 20-minute call with us.
This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.
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