This isn’t 1817, so some people are still surprised about why some investors spend a lot of money buying gold. Gold, and other precious metals like silver, has been historically considered wealth generators. Even as the economy has moved forward to depend on currency, there is a unique quality to gold that makes the metal worth owning.
Buying gold is not actually just for wealthy investors either. In fact, wealthy investors recommend that all investors diversify their portfolios with gold. Read ahead to find out why you may need to own some gold yourself:
How Gold is Valued Against Currency
The price of gold is valued in an inversely proportional manner to major world currencies like the dollar. This is an extraordinary relationship that moves the market. Historically speaking, gold prices are highly volatile, so it’s not a sound investment. However, the nature of the value of gold indicates that when the dollar value goes up, the price of gold comes down. Likewise, when the value of the dollar plummets, the price of gold skyrockets.
Now let’s consider the situations that affect the value of currency. When the market is doing good, the dollar is strong. There may be minute fluctuations here are there, but that’s to be expected. Then again, there are certain situations that make the value of the dollar come pummeling down to the earth. Financial crises, like recessions and depressions, cause the value of currency to nearly disappear. So what happens when you own your assets mainly in cash? When the market crashes, the value of these assets crash along with it. This is what happened to many investors during the Great Recession in 2008. Decades ago, a worse situation occurred during the Great Depression.
But what happens to gold during financial crises? It goes way up. The value of gold saw historic highs in 2008. Even smaller scales of financial uncertainty, like the recent Brexit, devalues cash assets, but strengthens the value of physical gold assets. Simply put, gold acts as a hedge against financial uncertainty. When you have gold in your investment portfolio, your wealth will be protected, even if the market crashes and all your cash assets are wiped out. Gold, therefore, is one of the most reliable forms of assets to own. This is why you might see headlines about prices of gold going up when there are financial or political uncertainties that could potentially affect the market.
Should Regular or Casual Investors Own Gold?
Gold is for everyone who has cash assets that could be affected by financial uncertainty. When the recession hit in 2008, it affected everyone, not just the high-rolling investors. Therefore, it’s recommended that all investors consider buying physical gold.
For most people, financial uncertainly mostly affect retirement savings. When you diversify your retirement investment portfolio, or a self-directed IRA, it’s not wise to have all assets in cash. You benefit from the returns of these investments decades from now on. No one can say what could happen during this period. There could be another recession, or the market could end up performing really well like it’s the nineties all over again. The point is, nothing is certain. That’s why it’s important to diversify an investment portfolio with physical gold.
Some Misconceptions to Be Aware Of
There are loads of misconceptions to be wary of when buying gold. First of all, the recession-proof value of gold only applies to physical gold, like bars, national minted coins, and bullion. Not gold stocks. If you own stocks in a gold mining company, or stock-traded gold ETFs, then these investments are still cash investments. If the dollar takes a hit, the value of these assets will take a hit as well. To benefit from gold’s value as a hedge against uncertainty, you need to own physical gold.
It’s important to note here that just any physical gold wouldn’t do. If you own gold jewelry, the gold in these items will have to be melted down and weighed to have actual value. The cash value of the jewelry doesn’t matter. Likewise, the value of collectible gold coins and hedge gold are two different things. If you spent a million dollars on a rare collectible gold coin, that wealth won’t immediately translate into gold value. The gold in the coin will only be worth its weight according to the spot price at the time.
If you are going to buy gold, you will have to buy in bars or minted coins. Bars are convenient for owning a lot of gold at a time. Minted coins have the advantage of being tradable too.
How Regular Savers and Investors Can Buy Gold
These days you can buy gold easily online. However, that doesn’t mean you should. Regular investors can buy gold from dealers. Unfortunately, there is not national agency that regulates gold dealers. Therefore, you will have to find dealers based on reputation and recommendations. As a rule of thumb, only buy gold from dealers that are banks, reputed financial institutions, or registered businesses.
U.S. Mint maintains a list of reputed gold dealers. Don’t mistake these dealers to be “accredited” and entirely reliable. However, you can refer to the list to find a dealer that you can trust for the most part.
When you buy gold from a third party, you will have to pay a fee that is slightly above gold spot price. Before buying, it’s highly recommended to check the spot prices for gold for the week. The price the dealer offers should only be about 2 to 5 percent higher than the spot price. Do not pay exorbitant amounts way above the spot price.
When buying, consider storing gold as well. Good dealers offer options to store gold when you purchase from them. Of course, gold has to be stored in a highly secure location. You can pay for a vault in a bank if you don’t want to store the gold with a dealer.
There’s another option to store gold: IRAs. You can add certain approved forms of gold to a self-directed IRA as a form of investment. This is highly recommended if you want to hedge your retirement savings. You will need to hold a regular IRA for some time before you can convert it to a self-directed one. You will also need to appoint a licensed trustee. But once you do, you won’t have to worry about another recession hurting your retirement savings.