With world inflation rates at their highest in decades now and forecast to stay high well in to 2023, gold has become a more attractive investment to many investors.
Historically, gold has been well-documented as an inflation hedge. Gold has done well over time as a value storage vehicle, with gold prices moving opposite the dollar. When the dollar weakens, gold strengthens in value.
Gold has also often moved in the opposite direction of the stock market. So, when the stock market drops, gold prices often go up. So, if you want to add more balance and value to your portfolio, investing in gold is one way to do it. You diversify your assets in a way that can at least partially protect you from a sudden market event. We have several recommended gold companies listed here.
How much gold should I own in my portfolio?
A rule of thumb is to limit gold to 5% to 10% of your portfolio, to ensure that your portfolio has room for other investments. However, always keep in mind that your portfolio should be structured in a way that supports you in reaching your long-term goals. So, depending on your goals, your current situation, and your risk tolerance, you might end up investing in a bigger or smaller share of gold in your portfolio.
CNBC host of Mad Money Jim Cramer explains, though, that he believes 10% is the upper limit because gold is more of an insurance policy than an investment. So, “no worthwhile insurance policy should be 20% of the money you have invested.”
Why own gold?
Throughout history, gold has always been seen as a special and valuable commodity. Coins with gold content first appeared around 650 B.C. and the first pure gold coins were minted during the reign of King Croesus of Lydia 100 years later.
Today, people invest in gold not only as a hedge against inflation but also against deflation. It also provides financial cover against geopolitical uncertainty and macroeconomic unpredictability.
Gold has always been considered by many as a good portfolio diversifier. Although the price of gold can be turbulent in the short term, it holds its value over the long term. In 2022, gold has emerged as the best performing asset class,
3 Kinds of Gold You Can Buy
Basically, there are 3 types of gold you can buy and own today: physical gold, paper gold, and digital gold.
Physical gold comes in the form of gold jewelry, coins, bars, and Gold Savings Schemes where you deposit your gold with a jeweler and earn a higher quantity of gold by the year’s end. The advantage is you have the real gold you can see and touch. The disadvantages are storage issues, possibilities for theft, and not being able to make charges or payments against your gold. In addition, it does not generate passive income. View our recommended top Gold companies.
Paper gold involves assets that represent the price of gold but are not actually gold. It allows you to get exposure to the price of gold in the market without your having to own real gold bullion. However, it is not backed by real gold; it simply is paper. Gold certificates, gold futures accounts, pool accounts, and most Exchange-Traded Funds (ETFs) are paper gold examples. Generally, paper gold is better for trading than for long-term investing.
Digital gold or digital gold currency (DGC) is electronic money backed by gold reserves that are stored in vaults by private agencies. Once you buy digital gold online, the companies selling them in turn buy the equivalent amount of physical gold and store the gold under your name in secured vaults. Four ways to invest in digital gold are through:
Sovereign Gold Bonds (SGB) – issued by the Reserve Bank of India (RBI) on behalf of its government; considered very stable since they are backed by the government; can be bought via subscription with RBI at limited quantities and via stock exchanges Gold ETFs – mutual funds whose units can be bought from stock exchanges; recommended for investors who want to buy gold in small quantities and keep them in Demat (dematerialization) or electronic format Multi Commodity Exchange (MCX) – MCX is a platform to trade in various commodities, including gold, through futures and options Digital Gold Wallets – mobile applications you can download and let you invest in pure 24k, government-certified gold through online fund transfer facilities; the gold you buy is stored safely with 100% insurance.
Considerations in Buying Gold
Investing in physical gold means buying gold jewelry, coins, and bullion from reputable dealers outside of conventional brokerages. This can be challenging for investors who are used to buying assets via brokerages.
You have to ensure that the jeweler, pawnshop, or online gold bullion dealer is trustworthy by doing your own due diligence research. For online dealers, you must check if they are duly licensed by their governments and what the reviews on them are. Proceed with caution. You’ll also need to pay for storage and buy insurance for your investment. CryptoandPreciousMetals.com Reviews Several Here
Investing in paper gold can involve buying stocks in companies that buy, refine, and trade gold. You can do this through your brokerage account. Remember, though, the shares of stock of gold companies are correlated with their share prices and the fundamentals connected to the companies’ profitability, operations, growth, track record, and long-term potential. This means that, like any other stock, they carry its own set of risks. Study the companies first before investing in them.
Three popular stocks in this sector are:
Barrick Gold Corp. (GOLD) which is headquartered in Toronto and operates in 13 countries all over the world; Franco-Nevada Corp. (FNV) which doesn’t own any gold mine but buys the rights to royalties from other gold miners; and Newmont Corp. (NEM) which is the world’s largest gold mining company headquartered in Colorado and operates gold mines in North and South America and Africa.
Other forms of paper gold investments are gold ETFs and mutual funds that give you exposure to gold’s long-term stability while also giving you more liquidity than physical gold and more diversification than individual gold stocks. Remember that you are not buying physical gold, though, but paper that is backed by the equity or debt of gold mining companies or futures and options contracts for physical gold bullion.
Their value may not match gold’s market price and the market performance of physical gold.
Investing in digital gold offers investors the following benefits: ease of exchange, no lower limit on investment, secure storage, genuineness of pure gold, and being able to use one’s digital gold investment as collateral for online loans. However, it also carries its own risks: no regulatory body overseeing it, there is a storage time limit after which you have to withdraw your gold or sell it, and most platforms have an upper limit on investments.
Generally, gold is an investing safe haven and insurance policy in times of geopolitical and economic upheavals. Although it can be as volatile as stocks, it holds its value well over the long term as has already been historically documented. As with any investment, gold still carries its own risks as well as its rewards.
Jeanette C. Patindol was an Economics professor at a university in Bacolod City, Philippines for 23 years before she “early-retired” in July 2020 to focus full-time on what she loved to do most — writing. She is happy to be writing for Crypto and Precious Metals as she believes in its mission of making investment education available, and meaningfully helpful for everyone. Jeanette is using her academic and Economics background in combination with her writing skills to help achieve this.