Stocks, bonds and cash are the most common assets people invest. Sometimes, they even include real estate. You can also find mutual funds that are related to each of these asset categories. How does gold fit in this picture? Inflation and economic crises are the two main uses of gold. The 1970’s were the last time gold saw a significant increase in its price. This period was marked with high inflation, high debt, and global turmoil. Many institutions offer gold IRA accounts, so it’s important to compare your options before investing.
While gold is commonly thought to be a metal used in jewelry and ornaments it is not the whole story. These uses help to identify gold based on its physical properties and not what it represents. Because gold is money, it can be used to hedge against inflation and other economic events. You can see this proof by looking at the fact that the central banks have been the largest buyers for gold. They don’t use gold for jewelry; they use it to protect their currencies. They have become net buyers recently after years of being net sellers. If gold were no longer a valid currency, central bankers would not be interested.
It is one of the most stable currencies in history and was once used to symbolize wealth. While this idea is still valid today, it is obscured by the fact the US dollar is now a representative and reserve currency for that wealth. No doubt you’ve heard of the “gold-standard”. One time all the currencies in the world were exchanged at the fixed rate of gold. It was the global base currency. Then all other currencies such as the pound, dollar, yen, franc and so on were compared to gold’s value. Only recently, the US dollar was used as a proxy to gold. The US government had enough gold to back up its representative currency at the time. This is similar in meaning to say that the US dollar was a receipt representing real gold stored inside a government vault. After the dollar was devalued from the gold standard, the receipt no longer had any gold backing it up. Instead, the US treasury’s power to tax the people and create value is where dollars’ worth comes. This idea implicitly stated that there was a trust that the government (or whoever issued it) would always create the value of the currency unit. At the time the gold standard was abolished, the deficit and national debt were smaller than today. At present, there is talk of government bankruptcy.
What does this mean for your investing? It is important to treat gold not as any other industrial metal but rather like a currency. Just like other currencies, the value of gold you buy in dollars can change daily, just as how many Euros are available to buy with your dollar. This is why gold can be volatile. Like any investment, it also has risks. What could impact the price of this precious metal? While there are many factors that can affect the gold price, the main factor is the currency’s purchasing power. Currency are relative to other currencies. This means that you can look at gold by asking how much it is worth compared with other currencies. All other currencies are based in trust. This means that currencies can be issued in any amount at any given time. Although gold production is growing every year, it is not as fast as other currencies that are issuing debt.
I understand this story. What can I do to invest in it?
The actual gold that I am referring to is the metal itself. There are many options for investing in gold, including gold stocks, indices and buying directly in it – either in bullion (bars or wabs), coins, or getting access through funds or dealers to physical metals. You can easily capture the gold trend if you are familiar with the concept of gold being a currency.
A fund should closely track the price of gold if you wish to purchase access to it. You will see small differences in the price of the fund and the gold metal due to fees, issuing units or trading patterns. These differences usually balance out over the long-term. A gold trust can either buy and hold the gold or it can be traded as an exchange-traded fund that imitates it. Another way to purchase gold is to physically buy it. If you deal in physical gold, you can do this through a currency dealer, a bullion dealer, or a gold coin seller. There have been many of these dealers in the past few years. Be sure to check out their track record and good reputation. You have to be careful about where you store your gold bullion. There is also the risk of it being stolen or lost. You can store gold in a safety deposit at your bank or let someone else store it for an additional fee. However, you should trust who you are storing the gold with. It is possible to pay high fees for buying gold. You will need to shop around just as you do with other items.
Shares are a great way to invest in gold. You want companies that can actually make gold. If you’re investing in both the company and gold explorers, this means that small minors and gold miners may not work well. There are many market factors that can affect the risk of buying gold stocks, including company management, mining locations, geopolitical risk, issuing new shares and company expenses.
You can also purchase a mutual fund that holds gold shares. Although this strategy offers the same risk and reward as individual shares, it allows you to diversify among more gold companies. Unfortunately, mutual funds have management fees that are usually higher than stocks.