Investing in gold, has been going on for millennia. Even though modern investment options such as NFTs, crypto, etc. are very compelling options to get rich, these new investments are uncertain and lack a history of value.
Let’s take Bitcoin for example. The price of 1 BTC has ranged between $47,000 and $16,000 during the prior year.
Even though these investment methods might make you rich quickly, they also have the potential to drop you below ground level in a jiffy.
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And that is exactly why physical resources like real estate, precious metals, etc. are still considered a great investment. gold and precious metals investing will always be in demand, and their value will likely increase in the long run as they become scarce. A small gold allocation in your portfolio could stabilize volatility and help long term returns.
Gold is considered one of the best precious metals for investment. Gold is useful, not just in jewelry, but also has its role in many industries from electronics to space exploration.
However, no investment is perfect. Even investing in gold comes with its own challenges and risks.
In this article, we take you through 7 important points that will help you get a head start with investing in gold. you’ll find out the differences between cash vs gold and how to make money in gold.
Price of Gold from 2004 -2023
7 Things to Know Before Investing in Gold
1. Understand the Gold Allocation in Your Portfolio
Like many alternative investments, the percent of gold allocated within your investment portfolio should be small. That’s because the only return you receive for gold, is capital appreciation. In other words, there are no dividend payments to soften the blow when gold prices fall.
Gold investors can go for years without making money on their gold investment. Imagine buying gold in 2011 near the $1,800 per ounce peak. It would take roughly 10 years for the price of gold to return to that level. And only recently, has the 2011 price of $1,800 per ounce surpassed that level.
That is why you diversify with stock, bond and cash investments in your portfolio, as well as gold.
2. When Investing in a Gold IRA or Brokerage Account – Pick a Trusted Custodian
An IRA or Individual Retirement Account is a retirement savings account with tax benefits. You can contribute your pre-tax or after-tax income dollars to your IRA.
A self-directed gold IRA is among the popular IRA types out there. As IRAs are aimed at long-term benefits, gold is a great investment for the same. IRAs are designed for long-term investing.
Physical gold is purchased and stored in gold IRAs. However, you cannot directly transfer the gold you own into an IRA, nor can you purchase new gold and convert it into IRA. Instead, you need to pick a custodian that can buy and store the gold in IRA for you.
There are lots of brokerage firms that offer gold IRA services. However, as you’re hiring an agency to buy and store gold as a long-term investment, it is essential that you pick the right custodian.
Always make sure to pick a gold IRA service provider such as Lear Capital, that has years of industry experience, positive reviews from existing customers and reviewing critics alike, and is transparent about the methods used to purchase/store your gold and any fee associated with it.
3. How to Make Money On Gold – Understand the ROI
Gold investing over the long term can yield significant returns on investment. But, investors need to remain patient when investing in precious metals. Because there are no dividends, your gold return on investment is based on price appreciation. IN simple terms, to make money on gold, you’ll need to buy low and sell high.
Gold is best considered a long-term investment. Since 2000, we’ve seen positive growth after the September 2001 terrorist attacks. through the first decade of the millennium. In contrast, notice declining gold returns from 1980 through 2000. You’ll also notice frequently uncorrelated returns between gold and the DJIA. So gold might be considered a hedge against falling stock prices, albeit imperfect.
50 year Price Chart – Gold vs DJIA stock index
Source: https://www.macrotrends.net/2608/gold-price-vs-stock-market-100-year-chart. Gold=Orange, Dow Jones Industrial Average stock market index = Blue
Gold is considered an important commodity that has withstood the test of inflation and global financial conditions. Don’t consider gold as a perfect hedge against inflation or stocks. But recognize that gold can offer a decent, long term return on investment for patient investors.
To make money on your gold investment, be prepared to own it for a long time. Also, be mindful of storage costs and keep them to a minimum.
4. Diversify Your Gold Investment
The philosophy of don’t put all your eggs in one basket is a relevant investment concept. The same applies to gold as well. Regardless of whether you invest in gold to meet your short-term or long-term goals, never try to put all your money in gold, or any investment.
Always make sure to diversify your investment so that your overall portfolio doesn’t take an unrecoverable hit when one investment class tanks. In most cases, having a diversified portfolio of stock, bond, cash, real estate and alternative investments will help smooth out your portfolios volatility.
5. Gold Jewelry Isn’t a Great Investment
Gold in every form is valuable. However, if you’re considering investing in gold jewelry, you might want to reconsider. Gold jewelry prices aren’t directly correlated with the price of gold. Gold jewelry isn’t usually pure gold and it needs to be mixed with metal alloys such as silver, copper, nickel, and zinc to maintain rigidity when made into jewelry.
Moreover, gold jewelry comes with a retail markup that the seller charges for manufacturing the jewelry. Since each piece of gold jewelry is distinct, it is difficult to value.
All things considered, gold jewelry will give you a lower ROI when compared with pure gold bullion, in the form of bars, coins, and ingots.
6. Ensure Secure Storage of Physical Gold
it is important that you ensure proper security for your physical gold. You have several gold storage options from in your home safe, bank safe deposit box, or remote gold storage facility. Consider purchasing insurance, if you store gold in your own home. Also, gold should be stored in a cool, dry location.
Many gold vendors will offer storage options. It’s important to consider storage cost, safety and convenience when deciding on a secure gold storage facility.
7. Cash vs Gold – Which is Better?
When deciding whether to invest in cash or gold, there are several factors to consider. Since we no longer tie the US currency value to the price of gold, and gold is rarely used as a medium of exchange, gold and cash have more differences than similarities.
In today’s market environment, you can receive upwards of 4.0% on your cash investment in a high yield money market account. While, there are no interest or dividends paid on gold. Cash is easily accessible from your bank or ATM account. You can transfer cash with an app in a second!
On the other hand, if you’re seeking capital appreciation, you won’t get that from cash. Gold has the potential to appreciate, and cash is more likely to depreciate than appreciate as inflation eats into the value of cash.
Whether cash or gold are better depends upon your needs. If you’re seeking the potential for capital appreciation, then gold is a better choice. If you want an asset in your investment portfolio that will throw off interest payments, and can be used as currency, then cash is king. Many investors like a cash allocation in their portfolio, regardless of the level of interest rates, to give them financial flexibility.
Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t personally believe is valuable.
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