Introduction
Everyone knows that old is gold, but what about the other way around? Is it possible that gold is old? There are many people out there who believe that gold is a good investment, especially when the economy takes a nosedive. If you are one of those people, you should make sure that you have the right strategy before jumping in. You cannot just put all your money in gold and hope for the best. You will need to double-check your goals and long-term investment strategy to make sure gold is the right fit for your portfolio. With the rise of inflation, you will probably be tempted to turn to gold.
Investing in Gold: Is It a Good Idea?
If you are thinking about investing in something to diversify your portfolio, then you should consider investing in gold. Gold is considered a good hedge against the rising prices. But, you should understand how gold works before you decide for sure. Similar to all other types of investments, you run the risk of losses. Investing in gold might not be the simplest thing, but investing in any component is never simple. You need to know all the facts and find out how it fits into your portfolio. To minimize risks in gold, you need to keep a few things in mind.
Make Sure You Keep In Mind These Things Before You Invest
There are eight things that you should keep in mind before you invest in gold. You should keep in mind that gold stocks are not similar to physical gold. With the U.S. dollar, it has an opposite relationship with gold. So, when the U.S. dollar goes down, gold goes up. You should keep in mind that you might not always get consistent returns from gold. (It’s not a wish-granting factory, so you need to keep that in mind.) Finally, you should know that gold is a very susceptible component to scams and rip-offs. This is why knowing all the facts are very important.
Gold Stocks Are Not The Same As Physical Gold
There are many investors who think that investing in gold stocks means gaining exposure to gold. That is not the case. If you invest in gold stocks, then you are not investing in physical gold. Even if you are investing in a gold mining company, you are still not investing in the physical gold itself. In the case that you want to add exposure to gold and you do not want to buy physical gold, then gold stock investments are a good option for you. Gold’s value could decline while the rest of the market is down, but this depends on the situation.
Gold and The U.S. Dollar Do Not See Eye-To-Eye
Gold and the U.S. dollar have an inverse relationship. This means that their prices go in different directions. When one of the components goes up in price, then the other goes down in price. This is why gold is considered a hedge against the dollar and other flat currencies. When the U.S. dollar is weak, then it supports the price of gold. During systemic risk, gold and the U.S. dollar are safe havens that could move in the same direction. Even though gold can be a good option for your investment portfolio, you should keep in mind that it does not act the way it should.
Physical Gold Gets Taxed At Collectible Rates
There are different ways to gain exposure to gold, which can go from physical gold to gold mining stocks. The main advantage that comes with investing in gold is that you could receive a favorable tax rate. Almost always, long-term capital gains are taxed at a lower rate than your marginal rate. But, this does not apply to physical gold. If you decide to sell your gold coins or gold bullion, then you will be taxed at the collectibles capital gains rate. It doesn’t really matter what your situation is, but you should be aware of the tax rate and plan accordingly.
Do Not Expect Consistent Returns With Gold
There are many advantages when it comes to investing in gold. But, like everything else, there is a disadvantage. You will not always find that gold offers consistent income. Many publicly traded companies create goods and services that people find valuable, but gold does not have an output. It is not like gold can create more gold; that is not how it works. The main form of profiting from gold is when the price increases. Michael Reynolds, the vice president of investment strategy at Glenmede, states that “gold derives 100% of its returns from the movement of its price, which can and has led to long stretches of under performance.”
There Might Be a Premium Involved With Gold
When you decide to buy gold, you will not just pay the stated price. Typically, you will need to pay a premium or a markup. The premium is added in the final price and could come from the process of gold. Gold needs more labor costs, which is why higher premiums are needed. You will only profit from gold when you surpass your premium costs. If you decide that you want to invest in gold, then you should make sure that you understand the costs. This includes the premium, the storage, and the higher capital gains rate. You should not be discouraged from investing in gold, but you should take into consideration the costs that follow.
Gold Coins Are One Thing, Gold Bullions Are Another
If you decide to invest in physical gold, then you will need to choose between gold bullion and gold coins. With gold coins, they are top quality, but they are rare. Make sure that the gold coins are certified and verified by an expert. The rarity of gold coins determines their value. So, you can think of them as a collectors’ item. Gold bullions could lose their value from a drop in the price of gold. But, certified and verified gold coins maintain their value, or even increase! Make sure you compare and contrast the pros and cons of gold bullions and gold coins before you invest in gold. That way, you will know which one of them will boost your investment portfolio.
Gold Is Very Scam Prone, So Watch Out
Gold certificates, or “paper gold”, make the investment process a lot easier for you. But, investing in gold certificates means that you cannot actually see or hold on to the physical gold. The only proof you have that you invested in gold is that piece of paper. If the economy is going through a whirlwind, then you will find scams at every corner. Make sure you take extra care from anyone who sold paper gold. You might find that the company sells the same “paper gold” several times. When you want to cash in your investment in an emergency, then that could only be the time that you find out about a scam.
Make Sure You Have Somewhere Safe To Keep Your Gold
You are probably wondering if you should invest in gold or not. If that is the case, then you should think about the actual physical asset. When you decide to invest in physical gold, then you can actually hold onto it. This means that you need a safe space to store it. Make sure that you buy a strong and unbreakable safe that could keep your gold. If you cannot keep it in your home, then you can always keep it in a safety deposit box. Safety deposit boxes can be in local banks or credit unions. If you keep your gold off-site, then you will need to pay a fee and that will decrease your profit.
The Final Verdict
Overall, you should not remain discouraged from investing in gold. It is a great option to diversify your investment portfolio. However, there are things you should consider before you invest in gold. Physical gold is not the same as gold stocks; they are two different components. Gold and the U.S. dollar have an inverse relationship, which means that when one goes up then the other goes down. You will be able to tax gold at the collectible rates. Additionally, you cannot expect consistent income with gold. You might even have to pay a premium when you invest in gold. Nonetheless, it is still a good option.
