The modern investment landscape is full of choices. Investors not only can invest in traditional stocks and bonds, but now also can partake in real estate, managed futures, precious metals and more. Precious metals such as gold and silver have been the topic of much discussion within the financial media in recent months as inflation runs hotter and rates remain at zero.
Investing in gold has both advantages and disadvantages and potential investors need to think these through before investing in metals. There are numerous ways to invest in gold, using different vehicles. Some investors may choose to buy gold mining stocks, while others may choose to invest in ETFs or other products. For the purposes of this discussion, we will discuss a physical gold investment.
Investing in physical gold is different than other paper gold investments. Physical gold, for example, is the only gold product that carries zero counterparty risk. A gold bar, for example, is recognised and valued all over the globe. Gold bars cannot default, cook their books, or go bankrupt. Their value is determined by the global market and cannot be manipulated or otherwise thrown off. Buying and holding physical gold bars or coins has numerous advantages and some disadvantages outlined below:
Gold is the only true form of money left, according to some, and may be used to facilitate trade anywhere on the planet. The lack of counterparty risk makes gold especially appealing, as it can provide a sense of security that other asset classes cannot. A gold mining stock can go bankrupt or default on its obligations, but the actual gold that is mined by the company cannot. Gold's lack of counterparty risk has become especially desirable during recent years. Rising sovereign debt levels, easy money policies and other issues have all put a focus on default risk and gold may be the only asset class that does not carry such risk.
Gold can be a powerful diversification tool for a portfolio. The yellow metal is uncorrelated to stocks and bonds and may provide an investor with much-needed diversification to help handle any significant bouts of market volatility. Central banks are the most powerful financial institutions on the planet. These super banks buy and hold massive amounts of gold for several reasons. One of the biggest reasons, however, is the diversification factor. These financial institutions understand the power gold may have to add diversity and credibility to their portfolios. If the most powerful financial institutions on the planet see the worth of adding gold, shouldn't you at the very least consider an allocation?
On the same note, gold can be a powerful tool for portfolio credibility and stability. Stock, bond and other markets can get very rough. The equity market, for example, could easily see its value cut by half within a matter of weeks or months, possibly even days. As these asset classes decline, investors may turn to alternatives such as gold to find value. This can, in turn, cause the price of gold to rise as the prices for other assets fall.
Another major advantage to gold is its liquidity. Gold bars and coins of the basic varieties can be found anywhere in the world and have the same value anywhere you may travel to. These coins and bars can be easily and conveniently exchanged or sold for cash at dealers and by third parties. Liquidity allows owners of gold bars and coins to quickly sell them to raise cash or to barter them for another medium of exchange.
Gold is also a major inflation fighter. With inflation currently on the rise in the U.S, and elsewhere, investors are turning to physical gold in order to preserve their purchasing power. Gold has a reputation as an inflation fighter due in large part to its ability to rise along with prices. This is the inverse of the dollar or paper currencies, which tend to lose value over time. Fiat currencies can lose value at an even faster rate during periods of high inflation. Gold is a dollar-denominated commodity. This means that as the dollar declines in value, the price of gold will have a tendency to do the opposite, or rise in value.
In addition to its potential to fight inflation and to preserve wealth and purchasing power, gold also has significant upside price potential. The yellow metal's all-time high is currently over $2000 per ounce. There is nothing to stop gold from moving significantly higher, however, possibly going to $3000, $5000 or even $10,000 per ounce.
Although buying and holding physical gold can have numerous potential advantages, it does also have some possible disadvantages. These disadvantages may not be enough to stop someone from investing, but they need to be considered in the due diligence process.
When someone wants to invest in physical gold coin or bullion, the costs do not typically end with the purchase price of the metal. Once you have paid for the gold itself, the shipping and insurance, you then have to figure out where you will store and secure your holdings. Although some may choose to purchase a home safe, others may utilize a bank safe deposit box or depository. Both of these services come at a cost that needs to be considered before purchasing any gold.
A bank safe deposit box is going to be affordable for the vast majority of potential investors. These secure boxes are located within a bank or bank vault and requite keys and identification for access. Although a safe deposit box may run less than $100 per year, there are other issues to consider outside of the cost.
A safe deposit box is only accessible when the bank is open for business. If you needed to access your gold on a Saturday night, for example, you will not be able to do so. While such a scenario may be unlikely, in the event that you required your gold on very short notice or in the evening you would be forced to wait until regular banking hours. This could mean waiting until the next morning or even until Monday if it is over the weekend.
In addition to the costs associated with storing your metals, safety is also a primary consideration. For someone holding enough metals at home to attract an armed robber, for example, a break in or attempted break in is a threat that must be considered. Not only does keeping precious metals at home pose a risk, but there is also the risk of getting the metals there. If a metals buyer were to make a large purchase at a local bullion shop, he or she would the have to presumably put the metals in their car and drive them home. Doing so would put the bullion at risk during transit, as it would need to be not only driven but also loaded and unloaded from the automobile. Although the metas may be insured against theft or damage, the buyer's health and safety are not.
Buying and holding actual, physical bullion or coin presentes a variety of issues. These potential problems are not limited to safety and security, however, and must be thought of before deciding to buy.In addition to safety and security, liquidity may present an issue for certain types of coin.
Numismatic coins are gold or silver coins that are collectable. This is to say that such coins may have more value due to their relative scarcity, low mintage volume or other factors. While numismatic coins can provide many of the same benefits as traditional bullion coins, they do also come with some specific challenges.
Numismatic coins can have values that far exceed the values of coins with an equal weight of gold. This extra value is derived from the coin's rarity or other collectable features. This collectable value can fluctuate greatly, however, and may see volatile swings from high to low. The volatility of these values may make such coins less desirable for gold investors and harder to sell. The difference between the buy and sell prices for these coins can be excessive, shrinking the market for them in the process. Although it certainly is possible for gold investors to purchase numismatic coins and later sell them at a hefty profit, the risk of buying these coins and later taking a loss due to the collectability premium is very high. For the majority of investors out there, they are better off buying as many ounces of gold as they can while leaving the collectable coin game to the professionals.
In addition to possible liquidity issues, gold coins and bullion can also potentially be called away by the government. This happened once before in history and it is a common cause of anxiety for investors today. Many people believe that gold is the only true form of money left on the planet. Given this reputation, it does make some sense that a government would want to get its hands on as much gold as possible. A possible call away for gold could be caused by a variety of factors. These could include a major war effort, a fiat currency collapse or other economic issues as well as a variety of geopolitical issues. Whatever the case may be, there is a risk of gold confiscation even if the risk is very minute.
The government may also pose a risk of higher taxation. As sovereign debt levels extend even further, governments may have no choice but to keep raising taxes. These tax hikes could be applied not only to income, but to capital gains and estate taxes as well. Precious metals could present an opportunity for the government to raise extra cash easily. To do so, of course, would require far more reporting of bullion purchases and customer tracking. This could cause metals prices to decline substantially as they are often purchased due to their privacy.
In summation, the primary benefits of gold ownership include:
The major disadvantages of gold ownership could include:
These lists are not all inclusive but may provide those interested in possibly buying bullion with a roadmap to guide them. Every type of potential investment, from stocks to real estate to metals, carries some degree of risk. Without risk, there is no reward. Savvy investors know how to consider the risks and rewards, however, and to make objective decisions based on those considerations.
The major issues worth consideration when someone is considering a gold purchase may be investment objectives, time horizon, risk tolerance, security and storage, liquidity and diversification. By carefully considering these and other factors, you may more easily arrive at an objective decision on buying gold and elect to make a purchase or not based on your needs.
Buying gold does not need to be a stressful event or consideration. It should be viewed as a reliable option, however, for investors looking for diversity and stability. The gold market not only can provide several protective benefits, but the market also has the potential to move sharply higher from previous all-time highs. This could not only help protect a portfolio, but could add considerable value to it as well.