Investing in gold is always a hot topic of discussion amongst investors but there is always a singular lack of clarity on the subject due to the paucity of information available. Even many retail investors who may have an inclination towards gold are steered away from it by brokers just because they themselves are often clueless about it. As a result, investments in gold have been conventionally done by banks, financial institutions and very large wholesale investors with the retail segment being largely restricted to purchasing jewelry. Every investor should know the pros and cons of investing in gold before taking a decision to include or exclude it from his portfolio.
Safety of Investment
Measured over relatively large period of time, it is observed that the price of gold continues to rise and this is a phenomenon across all countries of the world. As with every commodity, while there can be a dip in the price, gold has always recovered and scaled new heights. The price of gold has good insulation against crashes in the financial markets, political instability or the plight of any individual company or business sector. In fact, it is often seen that when stock markets tend to perform poorly there is a renewed interest in bullion because investors want to park their funds somewhere safe.
A Good Hedge against Inflation
One of the main reasons why gold is attractive as an investment option is because traditionally it has outstripped inflation and thus managed to preserve its value far better than many other financial assets. A simple example will illustrate this amply. The price of gold on January 1, 2005 was $437.80 per ounce, which by the end of 2014 rose to $1181.54 per ounce. In the intervening 10 years, it witnessed a rise of close to 270%, while in the same period the rate of inflation cumulatively rose by 24.2% only. Thus gold price increased by about ten times more than the inflation rate and represented an excellent hedge against inflation, and served to preserve capital well.
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It is relatively easy to invest in gold through authorized dealers. When you own it in its physical form, you can see and touch it. When kept in the form of jewelry such as men’s wedding bands or ladies’ necklaces you can proudly display it too for the world to admire. Physically owning gold also means that you can choose to monetize it whenever your require cash urgently. If you need extra security and safety you can own gold in the form of certificates like ETFs or ETNs that ensure high liquidity just like shares.
Disadvantages That Need To Be Reckoned With
While the advantages described above are very real indeed, there are certain disadvantages with investing in gold that you need to keep in mind too.
Buying gold is not as easy as buying equity; you need to buy and sell only through authorized dealers. When buying you will be paying a small markup over the open market price of gold, and conversely when selling, a small discount over the price will be applied. This will affect your final profit by a small margin, and is akin to paying brokerages when you transact in shares.
Conflicts in countries that produce a lot of gold may affect the market and you need to know to avoid kneejerk reactions. Governments buying and selling gold also tend to affect the price but you could also take advantage of that if you know enough about the movements and market projections.
Holding your gold investment in the physical format in your house may invite trouble from burglars. Even acts of God such as floods, fires, earthquakes, etc. may cause your investment to perish. Bank lockers can be very expensive in the long run and you would no longer to be able to see and touch it frequently.
While investing in gold can be quite easy, you need to know enough to make an informed choice about how much you should allocate it to your asset portfolio so that you can take advantage of its relative safety and superior returns and at the same time diversify your portfolio.