For centuries humans have coveted gold and investors today are no exception. Investors are not the only ones who have an interest in precious metals. Regular people also see gold for its value, especially when it comes to jewelry making. However, in this article, we will be focusing on investors and how gold has become an asset that everyone is looking to have.
Regardless of how you choose to invest in this metal, there are many reasons to diversify your portfolio with this asset. One of the most common reasons investors like gold is because of its stable price movement. Compared to other investment options like stocks, this shiny metal has proven to be a safe investment. Visit https://www.investopedia.com/investing/importance-diversification/ to learn more about the benefits of portfolio diversification.
Historically, gold is known to maintain its value even when other assets drop sharply. Its price may even increase as scared investors normally rush to buy it in times of uncertain market movements. Following how well the asset has performed over the years, some experts believe it is one of the best ways that investors can protect their wealth against inflation.
But precious metals investments can be quite tricky, especially for new investors. In this article, we will answer some of the most asked questions when it comes to investing in this asset.
Why Gold Investments?
We mentioned earlier that this asset maintains its value even during financial crises. Unlike other assets like stocks and bonds that are directly tied to and affected by the economy, political and economic decisions have no direct impact on this asset. Although its price value does not appreciate as fast as other assets, its safety, and steady rise appeal to many investors. Its stability is one reason investors diversify their portfolios with this precious metal.
Another reason you should consider this investment is that its value is universal. Regardless of which part of the world you are in, the price of an ounce of gold stays the same because it is universally recognized.
How Much Should I invest in this Precious Metal?
It has become common knowledge that investment portfolios should be diversified using precious metals like gold, silver, and palladium. However, not everyone is clear on how much of their portfolio precious metals should take. Although gold is regarded as a safe asset, experts still advise that investors allocate only between 5% and 15% of their portfolios to it. Aside from the obvious reason, which is to spread risk, other assets can be liquidated much faster than this precious metal, especially when it is in bars.
When is the Best Time to Invest in It?
You may find this disappointing, but the best time would be yesterday, and the next best time may be now. Here is why. The buying power of cash can easily be shaved off by inflation, which means the longer you wait, the higher the likelihood of you spending more to buy gold. This is because, unlike cash, its value is resistant to inflation.
Also, it is unlikely that its price would take any significant dip, but there is a greater chance of its price appreciating. What this means is that waiting for its price to drop before making a move may not be very strategic. That said, the hesitation of many investors is understandable as the entry price is quite high at $1,779.80 per ounce, at the time of writing this article. However, since its price is more likely to go up than down, investors should consider diversifying now.
How to Invest in Gold?
There are several ways one can invest in this precious metal. Below are a few of them:
Bullion Bars and Coins
Physical gold bars and coins are the most traditional ways to buy this asset. Some investors find it more reassuring to own the asset physically than to own it on paper as is the case with ETFs. It has been a debate for years now on which one to choose between physical gold vs paper gold among precious metal investors. Since both have their pros and cons, it is up to the investor to decide how they wish to carry out this investment.
If you decide that buying physical gold is the best way to invest in it, you will want to make sure you purchase your bullion from reputable dealers. Gold scams are becoming more frequent which means researching every dealer should never be neglected.
Gold-backed Exchange-Traded Funds (ETF)
This investment option is perfectly suited for investors that prefer some liquidity. By investing in these types of ETFs, you own the metal on paper. When you buy an ETF, you are issued a certificate of ownership that shows the amount of the asset your investment was able to get you. What is great about these ETFs is that they provide more liquidity to investors, and they can easily be exchanged with the issuing company for the physical asset they represent.
Gold Mining Stocks
Another option is to buy stocks from companies that mine this metal. These stocks are much more volatile than the metal itself as their prices reflect the management decisions of the issuing company. What this means is that the prices of these stocks will move according to how the company performs. If the issuing company does well, so will their stock prices and vice versa.
Gold Futures
A futures contract is an agreement to buy or sell a certain amount of an asset later, in this case, the shiny yellow metal. It is this contract that is traded on an exchange. Gold futures have more liquidity than coins and bars and there are no management fees, although brokerages may charge a commission per contract.
Futures investment can generate huge returns, however, as with any high-return investment option, risks are much higher. Therefore, a futures contract may not be the most suitable for an investor that is just starting. Click here to learn more about the advantages and disadvantages of futures contracts.
Final Thoughts
Before choosing a method of investment, consider your risk-tolerance level. Options like futures, ETFs, and stocks are more volatile when compared to physically buying the metal. As with most other types of investments, adequate research is compulsory if you are to get returns on your investment. Ensure you fully understand each instrument and its risks before making a choice.
