5 Things To Consider When Investing In Gold

Category: How-tos

Investing in gold has often been the go-to strategy for investors looking to protect their investment during times of economic uncertainty. This trend repeated itself after the outbreak of the coronavirus pandemic in 2020. But while gold is undoubtedly a great store of value and investment, you shouldn’t add it into your portfolio without first doing exhaustive research. After all, it’s not immune to economic downturns like every other investment.  

With this in mind, you should familiarize yourself with a couple of essential details before investing in gold to hedge against inflation and diversify your portfolio. If you’re interested in such information, look no further:  

1. You Need Storage Space

If you decide to invest in physical gold such as bullion and coins, it’s critical to have reliable and safe storage space. This can either be your home, a metal storage facility offered by a credit union, banks, or firms outside the banking system or rent a safety deposit box at your local bank. The best way to identify the best storage space is by understanding how fast you might want to retrieve your gold.  

Storing it at an external facility does attract a certain percentage, and this, alongside the fee paid to Gold IRA custodians, reduces your possible gains.  

2. Relationship Between Gold And The U.S. Dollar

Another consideration to consider when investing in gold is understanding how it’s connected to the U.S. dollar. Typically, these two assets tend to move in opposite directions, hence having an inverse relationship. It is the main reason investors buy gold when the value of the U.S. dollar and other currencies start to fall, often during economic recessions.  

However, there are specific scenarios when this inverse relationship criterion doesn’t apply, such as during times of systemic risk. During such periods, the dollar and gold increase in value due to increased demand by investors who deem them both to be a haven.  

3. Price Shifts

Gold is often viewed as a haven during times of economic uncertainty. And while this is no doubt an appealing fact, it’s important to note that gold, similar to stocks, also suffers from price fluctuations. It means there are times when gold prices might plummet and not generate the consistent income you had expected to earn. Therefore, you need to understand before investing in gold despite its value increasing close to twice its worth in the last decade.

However, despite the price fluctuations, you should still go ahead and know that its value will continue to rise in the long run. As a result, the value of your investment increases due to the price increase of gold. Therefore, you shouldn’t decide gold isn’t a worthwhile investment because of a short period of underperformance.  

4. How You Can Invest In Gold

Before you even find out why you should consider investing in gold, it’s important to understand that this precious metal comes in various forms. Knowing this before spending your hard-earned money is critical and these different forms include:

Physical Gold

It’s the oldest and most common way of investing in gold. Physical gold, also referred to as bullion, includes gold coins, gold bars, and gold jewelry that boast the highest purity levels. When investing in physical gold, it’s best to buy smaller-sized ones because they’re a lot easier to find a potential buyer.  

Also, if you’re decide to make an investment in bullion, you should invest to have a good storage for them.  

Gold Stocks 

Another way of investing in gold is by buying stocks of gold mining firms. This technique of investing in gold provides you with the choice to decide which company to invest in and greater liquidity. Nonetheless, it does have its challenges too, including the performance of the stocks is significantly linked to the prevailing gold prices. 

Gold Funds 

This method is somewhat similar to gold stocks, with the difference that you’ll be buying shares of various companies involved in gold-related activities. These companies can either be involved in different activities from the processing or mining of gold. While you don’t get physical ownership of your gold investment, gold funds are a lot simpler to liquidate. In addition, they offer you greater diversification, unlike gold stocks. 

Gold Futures 

Gold futures refers to an agreement to buy or sell gold at a future date at a specific price. Consequently, this contract gets traded on the exchange. The advantage of gold futures is investing in one requires zero management fees, but you may need to pay a commission or brokerage fee per contract. With gold futures, you enjoy greater liquidity, but this trading involves a lot of risks, so it’s a worthwhile option if you’re an experienced investor. 

You’ll Possibly Pay A Premium When Buying Gold 

The price you see gold trading at on the commodities exchange is referred to as a spot price. This isn’t how much you’ll be expected to pay when buying gold as an investor because the dealer will often sell more than the spot price. This usually happens because they factor in additional costs such as manufacture and distribution costs as well as the dealer fee. The higher premiums are generally because producing gold is labor-intensive. 

When selling gold, the dealer will also buy below the spot price. Therefore, you should only sell your gold after exceeding the premium you had paid earlier on, and this reduces your profit margins. Due to such complexities, it’s best first to understand the costs involved before you invest in gold. 

5. Takeaway

Gold has for ages been famed for its financial security and as a symbol of wealth and propensity. Because of this, its popularity has kept soaring among investors looking to diversify their portfolios. However, you must never rush into buying gold without first examining several things about investing in gold or else risk buying gold at inflated costs or worse being duped into buying impure gold. Fortunately, there’s less risk of this happening after reading this comprehensive article on crucial things to know when investing in gold. 

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