Is Investing in Gold Still a Smart Move?

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Gold has been globally recognized for its rich history across different cultures and increasing value surpassing other precious metals since historic times. However, there is a conflict of opinion among investors. Some consider gold an asset with intrinsic qualities making it necessary for investors to hold it in their portfolio while others merely regard it as a material used in jewellery. This debate of gold’s true value and its role in investment has pointed to one question, i.e., does it still pay to invest in gold or not? 

Today, gold can be a safe-haven asset, but will it be beneficial for the future as well? Let’s find the answer to this in this comprehensive guide.

Ways to invest in Gold

Investing in gold can be done in numerous popular ways. The conventional one is purchasing the gold in its physical form like gold coins, bars, and jewelry; however, this offers many disadvantages like high storage costs, huge transaction costs, poor liquidity, etc. For the past few years, the rise in modern technology has changed the way investors used to purchase gold. Now they can choose from a plethora of options like:

  • Futures: Gold Futures contracts are the tools used by traders to control price risk. It provides that gold will be delivered at a specific predetermined price and time in the future. Being traded at centralized exchanges, it is more flexible and leveraged than trading commodities
  • Stocks: Investors can add gold as a valuable metal to diversify their portfolios by investing in the stocks of gold mining firms, providing exceptional exposure to this precious yellow metal. 
  • ETFs: ETFs or Exchange-traded funds are a collection of assets that are compiled into funds. By investing in gold ETFs, investors are allowed to access plenty of opportunities by using small capital amounts.
  • Spot Metals: Spot metal trading involves buying and selling physical gold for immediate delivery. Depending on the demand, supply, economic factors, and geopolitical events, the prices in the spot market can fluctuate. 

Why invest in Gold?

Throughout the history, gold has been considered as a store of value. Globally, people believe in this theory and invest in gold as it offers stability over other assets even in times of market turbulence.

 Here are some of the practical reasons to think about investing in gold:

History of holding its value

On one side where paper currency, coins, and other assets lose their value through the years, there is gold whose value has been maintained throughout the ages. Most people consider gold as an easy investment option that can be passed to the next generation without any hassle, particularly in the form of jewelry. Moreover, it doesn’t lose its sheen even for decades, thus, preserving its value irrespective of its age and safeguarding the invested money for future needs.

Protection against Inflation

Inflation refers to the rate at which an asset loses its value over the years. Unlike other investment options, it has been noticed that gold has been an incredible hedge against the declining U.S. dollar and rising inflation. Its value tends to rise with the increase in the cost of living. This happens because, at times of inflation, the fiat currency loses its purchasing power, and gold is priced in those currency units. A prime example is of 1970’s when prices of gold shot during rising inflation. 

Additionally, gold is recognized as a store of value globally, thus, people are encouraged to invest in gold when their local currency starts to lose value.

Supply constraints and increasing demand

Since the 1990s, the sales of gold bullion from global central Banks’ vaults have contributed to the most of gold supply in the market. However, in 2008, the selling of gold by global central banks was slowed down greatly. Another concerning thing includes the decline in the production of gold from mines since the 2000s, limiting the flow of gold in the market. Though there is a limited supply of gold, its demand is increasing in some of the developing countries where it is seen as a symbol of prestige and culture. For example, in China, buying gold bars is considered a traditional form of saving. 

Diversification of Portfolio

Investment outcomes are highly influenced by market volatility caused by various factors, leading to unexpected financial losses. To limit the risk of such losses, most experienced investors follow trading strategies to diversify their investment portfolio. The key principle behind diversification is to find different investment options that are not closely correlated with one another. According to the study, it has been seen that gold doesn’t hold a correlation with stocks and any other financial asset, as:

  • During the late 1970s when investing in stocks led to huge losses, trading in gold was a great option to consider.
  • Between the late 1990s and mid-2000s it was horrible to invest in gold while the market was favourable to buy stocks.

Conclusion

To conclude, every investment option, be it investing in gold or other assets offers benefits as well as risks associated with it. However, it is apparent that the advantages of investing in gold outweigh its disadvantages, as it can be used as a shield against inflation and offers excellent liquidity. Now, investors must choose how to invest in gold, whether go with physical form or ETFs and funds depending on their risk tolerance and expectations of the outcomes.