Are you interested in investing in physical gold? This is a great way to diversify your portfolio. Plus, it gives you the opportunity to acquire a valuable tangible asset. From gold coins to bars, there are different types of gold to choose from. However, if this is such as great investment opportunity, why isn’t everyone loading their portfolios with gold? What’s the catch?
If you’re interested in the pros and cons of investing in gold bars, coins, and bullion, you’re in the right place. Here’s what you need to know:
If you’re interested in buying this precious metal, you need to know which gold product to buy, where to purchase it, and how to buy it.
Did you know there are various types of physical gold you can buy? However, this also depends on whether you’re simply buying gold in a normal cash transaction or investing in it for your IRA. The first option gives you endless options, whereas the latter has more limitations.
You also have the option of investing in gold ETFs or gold mining stocks, which is completely different from buying physical gold. Then, there’s also gold jewelry. As you can see, the list goes on and on.
If you’re shopping for physical gold, here are a few options to consider:
Whether you’re buying gold stocks or coins, each has different pros and cons. Your precious metals broker can help you weigh the advantages and disadvantages of each option to determine the best product for your specific portfolio diversification. However, we’ll go into a few of the more general aspects.
Physical Gold vs. Gold Stocks
The main appeal of gold is that it’s not as volatile as other types of equities. Gold prices don’t fluctuate as quickly or drastically as other investment options, and when it does, it often stays within a specific range. However, because of this, gold returns are much lower than gold stock returns.
Gold stocks have greater liquidity, meaning you can sell them much more quickly than if you were to sell physical gold.
Lastly, gold investors can earn dividends on stocks; however, owning physical gold does not yield any type of earnings.
Investing in Gold: Pros and Cons
Should you invest in physical gold? Unfortunately, there’s no straightforward answer to this question. There are a number of factors to consider.
Let’s look at the advantages and disadvantages:
Anyone can buy gold. You can compare the features and prices of this precious metal without opening a brokerage account.
However, it is advisable to open an account with a broker.
A Hedge Against Inflation
Gold is a great inflation hedge. Many investors fear inflation since it affects the value of money stored in central banks. This is where the time value of money comes into play, which states that the purchasing power of currency decreases as time moves on.
The gold price is not affected by inflation in the same way as the dollar.
This is probably the biggest advantage of owning gold. The gold price is known for performing well during times of economic uncertainty, which is why it’s a great way to balance out your portfolio.
The stable and rising gold prices protect investors against extreme situations in financial markets, such as a stock market crash or economic depression.
Security of Value
As has been proven, the price of gold and other precious metals normally increases steadily over time. Yes, the price still drops; however, it always increases again.
This means that you don’t have to worry about the performance of a particular company or industry when evaluating the value of your gold investment, unlike mutual funds, stocks, and bonds.
In fact, in times of economic uncertainty, more people start investing in gold, which increases its price.
You don’t need any type of investment experience to invest in gold. Additionally, you can easily get advice from a financial analyst or broker.
Doesn’t Earn Passive Income
Many people look for investments that can generate income. If this is what you’re looking for, then gold is not the answer for you.
This commodity doesn’t produce anything, unlike land.
Storage is one of the biggest problems when it comes to investing in gold. This metal needs to be stored safely in a safe or safety deposit box at a bank.
Many investors don’t have the capacity to store the gold themselves, meaning they have to pay to store it in a vault or safety deposit box.
Storage costs often also mean added insurance costs.
Taxes and Premiums
This is a major issue when it comes to investing in gold. Gold is almost always marked up from the current market price, meaning you have to pay a premium to obtain it. You do run the risk of making a loss on this premium.
Gold also has tax consequences. When you sell gold for a profit, you are liable for capital gains tax, charged at 28%.
Gold Doesn’t Have a Great Return History
Believe it or not, gold returns are significantly lower than returns from stocks and bonds. This can be seen by evaluating historical returns.
The Bottom Line
If you’re interested in buying gold, there are a number of factors to consider. From gold futures to exchange-traded futures, coins, and bullion, there are numerous options to choose from. These different products yield different returns and each has its own pros and cons. Dividends, storage, taxes, and security are all things you need to keep in mind when determining which product is ideal for you.
Should I Buy Physical Gold or Stocks?
This depends on what you’re looking for. If you’re risk-averse physical gold is a better option; however, if your want a higher return stocks are the way to go.
Do ETFs Own Physical Gold?
Most ETFs are established as trusts, meaning the fund owns a specific amount of physical gold.
Should I Buy Gold or Silver?
Again, this depends on your specific requirements. Both are an inflation hedge, but silver is must cheaper. Gold generally outperforms silver.