Gold is probably the most popular commodity in history, being used as currency and a store of value from as far back as 4000BC.
It is a precious metal that is valuable for its industrial applications (in electricity and computing), in the jewelry manufacturing sector, and also simply for its relative scarcity.
It has always been used as a monetary instrument throughout history because of how much value humans have placed on it.
Today it is not exactly used as currency but it is still used as a relatively stable store of value.
FACTORS THAT AFFECT THE VALUE OF GOLD
Here are a few factors that affect the prices of gold on a global scale. You need to know these things before you buy gold.
- Stability: For a lot of global currencies, gold acts as a relatively strong foundation and store of value, hence it is considered a fairly secure asset. But under certain conditions like economic or political instability or times of turmoil or national unrest, the price of gold tends to increase as governments, institutions and individuals rush to it as a safe haven. In times of relative stability, the price of gold tends to drop, providing opportunities for investors.
- Central Banks: Central banks in many developed nations possess immense power to influence the global gold markets. The main reason for this is that many of the world’s gold reserves are controlled by central banks within developed nations, in locations such as Europe and North America. If banks unexpectedly increased or decreased their gold exposure, however marginally, the impact on the gold price will be amplified.
- Supply and Demand: Gold, just like many of the other assets in the global markets, obey the laws of supply and demand. If the demand for gold increases excessively for any reason (assuming the supply is constant), the price of gold will increase. Conversely, if the demand for gold suddenly drops (assuming the supply remains constant), the effect is that the price will decrease.
SHOULD YOU INVEST IN GOLD IN A RECESSION?
Generally speaking, gold prices and the stock market have an inverse relationship. More often than not, when the stock market does well, gold prices tend to reduce, and when the stock market crashes, most likely we will see the prices of gold skyrocket.
The reason for the increase in the price of gold is simply an increase in demand as more and more investors (governments and individuals) look for safer stores of value.
The subprime mortgage crisis occurred between the years of 2007 and 2010. This crisis was triggered by a massive drop in the prices of homes after the collapse of the housing bubble. This in turn led to the great financial crisis of 2008.
This resulted in the prices of gold skyrocketing. The same thing happened in the economic recession that happened much earlier at the turn of the century. Historically, gold has had an inverse relationship with economic indices.
But this is not the full story.
When you look at things from a much wider perspective, the markets tell a different tale. Over the past 30 years, the Dow Jones Industrial Average - or simply The Dow - (which is a pretty good representation of the stock market in the US) has fared significantly better than gold.
Although the stock market has had its fair share of ups and downs, in the overall picture, it has done much better than gold.
Including gold in your investment portfolio can help if what you want to do is diversify your assets, which can help you stay afloat if a recession hits. But it does not produce as much cashflow as other assets.
You should exercise a lot of caution if you are going to invest in gold, and invest in limited quantities. It is important to know how to buy gold. Don’t just buy impulsively.
FOUR WAYS TO INVEST IN GOLD
- Physical Gold (Gold Bullion): When most people think about investing in gold, this is what they imagine. And although owning gold in this form is more emotionally satisfying than other forms, because you can interact with the gold physically ( this gold is usually in the form of gold coins, gold jewelry, and gold bars), it also has some serious risks and shortcomings. For one, this gold has to be insured because it is a physical, tangible asset in your possession, which is an extra cost. This gold also has to be kept with extra care and safety to avoid the possibility of it being stolen.
- Gold Stocks: Gold can be invested in by investing in the stocks of gold mining companies. Knowing how to buy gold this way is important. Of course, this type of investment comes with its own risks, just like investing in any regular stock. The advantage of this method of investing in gold is that you get to choose which company you invest in. Although you aren’t going to have the emotional satisfaction of having the gold physically, this form of ownership is much more liquid as you can sell the stocks anytime for cash. Before you invest in any stock, ensure you study it carefully and understand the risks fully. Learn more about the stock market and its potential risks here.
- Gold Funds and ETFs: Mutual funds are pools of money from public investors, and that money is usually used to buy other securities such as stocks and bonds. When you invest in gold mutual funds, you are buying shares in several gold-related securities, such as many companies that mine or process gold, but you are not purchasing gold or individual stocks. This kind of investment is much more liquid than investing in physical gold, and it also offers more heterogeneity than investing in individual stocks. Legal safeguards are also offered by ETFs and mutual funds. You should also be conscious of the fact that some funds charge management fees. Three of the largest ETFs include SPDR Gold Trust, iShares Gold Trust, and Aberdeen Standard Physical Swiss Gold Shares ETF. Learn more about mutual funds here.
- Gold Futures: I would advise you to stay away from this investment if you are new to the world of investing. This kind of investing is relatively riskier than the others. A gold futures contract is basically an agreement to buy or sell a certain quantity of gold at a fixed price at a future date. The contract itself is what is traded on the exchange. While brokerages can charge a trading fee (also known as a commission) per contract, gold futures have more liquidity than physical gold and no management fees.
GOLD DIVERSIFICATION: Gold is not highly correlated to other currencies; hence it can really help you diversify your portfolio. Diversification is a good thing in that it exposes you to a wide variety of industries and sectors. Investing in gold ETF or stocks exposes you to the gold sector.
Of course, if your entire portfolio is made up of gold investments, it won’t be diversified at all.
HOW TO BUY AND SELL GOLD
To get started as an investor in gold, you need to understand the kinds of possible investments and decide which one is best for you. Here are some tips on investing in gold:
Investing in gold stocks or funds: To get started with this, you will need to open a brokerage account. Many investors use a brokerage account to purchase and sell securities such as stocks, shares, and mutual funds.
Similar to a bank account, you can move money in and out of a brokerage account, but unlike banks, brokerage accounts also offer you access to the stock market and other assets.
Since investment interest in a brokerage account is taxed as a capital gain, it's also regarded as a taxable account.
When contrasted with retirement accounts (like IRAs), which have a different set of tax and withdrawal rules and could be best for retirement planning and investing, this is a better option.
Opening a brokerage account is pretty easy and straightforward. You should be able to start and end the process within 15 minutes.
In most states within the US, you have to be at least 18 years old to legally open a brokerage account.
As soon as you have opened the investment account, you’ll need to make a deposit or transfer funds to your broker account.
The broker will walk you through the process. After you have made the transfer and your brokerage account is funded, you can begin investing.
Individual stocks and exchange-traded funds (ETFs) are bought for their share price, which can range from $10 to four figures, but mutual funds have a minimum investment threshold, which is mostly $1,000 or more.
Here you can find some reputable brokers.
Buying Physical Gold:
- Buy from a trustworthy dealer: If you are not careful, you can fall for cheap scams. Ensure you only purchase your gold from reputable dealers.
Use the National Futures Association’s Background Affiliation Status Information Center to check on a firm or individual’s background.
- Be mindful of dealer fees: Most dealers will charge you for more than the actual price of gold on the global market.
- Ensure you have a safe place to store: Invest in keeping your gold in a safe place. Gold is valuable and there might be people who might want to steal it. You should also consider getting insurance for the gold as an extra precaution.
Should you invest in gold?
All forms of investment have a measure of risk associated with them. If you are not comfortable with risk, you might not want to invest in gold, or just find very low-risk instruments to invest in.
Even though gold is very tempting to invest in, without adequate knowledge of what you are investing in, you might as well be throwing away your money.
Gold is speculative and is not very appropriate for long-term investments. And it might be better to buy gold in a highly liquid, tradeable security. It is easier and cheaper that way.
Honestly, I don’t think investing in gold is for everyone. Warren Buffet as well other seasoned investors advise against it, as opposed to investing in cash-flowing businesses.
Most of what causes volatility in the stock market are simply human emotions. But rushing to purchase gold at every slight drop in the Dow may not be a smart move.
Market Volatility is normal. Learn to think long-term as an investor. Don’t invest in gold impulsively, ensure you follow your investment plan.