- 02 Feb 2023
- Precious Metals
- Comments: 0
A private investor may want to buy gold for a variety of reasons. Gold is a preferred investment for some because it allows them to see their money at work. They may rest easy knowing their gold is safe, whether in a home safe, a storage facility or a bank vault.
Conversely, when you put your money into the financial markets, all you receive is a piece of paper (or a webpage) that details how much you have and where it is stored.
Many people may store their wealth in gold due to a common mistrust of the financial markets. They dislike working with financial intermediaries like banks and brokers. They want to acquire actual gold bars as a long-term investment alternative to traditional financial instruments like stocks, bonds and mutual funds.
Since the United States government spends too much and has too much debt, investors are concerned about the dollar's future price and worth. Other investors also think gold is the best long-term investment since its value will increase. Is that the case? What other safeguards can gold offer against the volatility of the stock market?
In this article, we'll look at the pros and cons of investing in gold bullion, so you can decide whether it's the right option for you.
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History of Gold Investing
Understanding gold's economic significance across time might help frame your investing decisions. For almost as long as there has been trading, gold and silver have been useful to the economy. The use of precious metals as early forms of currency was a no-brainer.
They retained their worth because of their usage in jewelry production and scarcity. Compared to other forms of currency, precious metals were far more portable, making them an attractive option for monetary use.
Gold and silver coins continued to be widely used as currency until the late 19th century. The first dollars were minted as silver coins worth one ounce each. Receipts for precious metals kept in a bank vault were the earliest forms of paper currency in Western countries.
Until the 1870s, gold and silver were legal tenders in the United States under the country's "bimetallic standard." The widespread availability of unminted silver was seen as a threat to the financial system's stability. Hence silver was abolished as a standard in 1873. As a direct result, we entered the time of the gold standard.
The early 20th century saw additional development of monetary systems, although most currencies still had a fixed value of one ounce of gold. There was a consensus that the gold standard should be abandoned in 1944.
When the Bretton Woods system was implemented, the US dollar value was pegged at $35 per gold ounce. Therefore, the value of gold, rather than currencies, was essentially set. Similarly, the Bretton Woods system had a promising start but eventually proved unsustainable, especially for the US.
The system effectively failed once the United States withdrew from it in 1971. As a result, the value of the US dollar fell and the price of gold was unconstrained.
How to Own a Physical Gold Bullion
Several different types of gold bullion are available for purchase, including coins, bars, rounds and ingots.
Advantages of Investing in Gold Bullion
Gold is only one investment option and any savvy investor knows it's important to weigh all potential benefits and drawbacks before making a final decision. Let's look at the benefits of investing in gold.
Gold's steady price growth over time is attractive to investors partly because it gives them a sense of security. Gold's price may drop temporarily but rises again in the long run. Using past trends as a guide, we may predict that gold's price will be significantly higher in ten or twenty years than it is today.
Gold's worth is independent of the fortunes of individual companies or sectors, unlike the valuation of stocks, bonds or mutual funds. Although gold prices are affected by the status of the economy, a bad economy does not always result in lower gold prices. In fact, as a hedge against the unknown, more and more individuals are putting their money into gold, increasing its price even more.
A Hedge Against Inflation
How inflation will affect the value of a single dollar is one of our primary concerns with regard to the funds in our bank account. The dollar loses its value over time. If you flip through a magazine from twenty or thirty years ago, you might be surprised to see how low prices in the advertisements were.
As an illustration, in 1990, the average home price in the United States was around $150,000. The average cost of a home in 2010 was over $220,000, which is a 20% increase from 1990. Was it a wise decision to invest in a home or has the currency lost its purchasing power?
Look at the same home via the lens of gold. Average gold prices in 1990 were about $383 per troy ounce. This home could have been bought for 392 ounces of gold. Jump ahead to 2010 and the average price of gold was $1,118 per troy ounce. In 2010, 197 ounces of gold would be enough to buy the same $220,000 property. The dollar's value fell over that time, while the value of gold remained stable.
Gold was selling for around $435 per ounce in January 2005. In December 2014, the price of gold reached an all-time high of $1,180 per ounce. Considering that inflation was just 24% over the roughly 10-year period we are looking at, you can see that the price of gold has increased by order of magnitude or more.
Gold investment is surprisingly simple and newcomers may learn the basics quickly even without prior knowledge of financial markets. A broker or financial analyst will likely focus more on the drawbacks of gold investment than on the benefits.
They probably won't let you know how simple it is to acquire gold for speculative purposes. Gold is readily available in the United States from various sources, including jewelry stores, coin shops and bullion dealers.
Plus, you have nothing to be concerned about regarding the safe keeping of your gold. Safely storing your gold is as easy as renting a bank-safe deposit box. Buying more safe deposit boxes is as simple as buying extra safe deposit boxes as your gold collection grows. Then your money is kept as securely as possible.
Rising Demand for Gold
The rising demand for gold reflects the world's expanding population and the increasing economic clout of many developing nations. According to the latest statistics, India and China are responsible for most global gold demand. These two nations, notably India, have expanding populations and thriving economies. Even if the price of gold falls yearly, it will eventually recover because rising national wealth in these countries will lead to rising demand for gold among residents and investors.
Hedge Against Market Downturns
People often invest in gold out of nervousness about the future performance of their other financial holdings. For instance, if your money was invested in stocks, bonds and mutual funds, you'd be in serious trouble if the market had a fall like the one we witnessed in 2008.
An individual who invests a significant amount of their savings for the long term in real gold should not worry as much about the effects of a financial crisis or a worldwide market collapse. The price of gold tends to rise during these times as more individuals seek tangible investments in the face of declining confidence in the financial markets.
Disadvantages of Investing in Gold Bullion
Gold, like any other investment, is an excellent choice when you understand it and act accordingly. However, gold is not without its drawbacks. Let's look at the shortcomings of investing in gold.
One of the biggest drawbacks of investing in physical gold bullion is its lack of liquidity. Unlike other investments such as stocks or bonds, physical gold bullion cannot easily be converted into cash. To sell gold bullion, the investor must first find a buyer willing to pay the current market rate for the gold.
But if you're patient with your gold investment, you'll be able to sell it for a substantial profit compared to what you spend in the future. A profit is still assured even if the dealer you choose offers you less than the current market pricing for gold. This is because the current market rate is almost greater than when you purchased the gold.
Gold is not stored at a bank. Instead, it is stored in vaults or safety deposit boxes worldwide to keep it secure from thieves and those who use it illegally.
Gold is the only metal that can't be duplicated by a fake, so it can't be counterfeited. As we have discussed previously, the price of metal is set by market forces and gold prices are constantly increasing. The high demand for gold makes theft a lucrative crime, leading to more theft.
In addition to storage fees and security costs, you will have to pay insurance to protect your gold from theft and potential damage from fires or floods.
Minimal Gains During Market Stability
The ability of gold to protect its value after a market crash is one of the reasons why investors choose it. On the other hand, gold prices tend not to show large increases during market stability or advancement.
Investors are less inclined to deposit their money in gold when confident in the financial markets. This results in a greater global supply of gold, which may either lower prices or keep them constant.
Gold investments are generally safe over the long term, but if you hold them for ten or twenty years during a strong market performance, you may not see the kind of return you were hoping for.
Gold is an excellent choice if you're looking to make a long-term investment in an alternative asset. The price of gold has shown a tendency to rise over the decades and it is easy to understand and trade.
Physical gold investment is the best way to go. You'll have something physical to show for your investments and you'll also be able to store it safely. Usually, when you invest in gold bullion, you are investing in gold coins or bars because that is what is most practical when an investor needs to manage their assets.
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