With its long history as a store of value, gold has traditionally been used by investors to guard against stock volatility, currency fluctuations and other market risks. But with the extreme unpredictability we’re currently experiencing, how should you view gold as an investment?
Gold has always had a sense of allure to it. For thousands of years, humans have looked to gold as an investment and as a store of value. For the past century gold has swung in and out of fashion with investors, surging in times of economic stress or political turmoil. When asked if it’s a good investment, the answer is essentially, maybe. At Johnson Wealth Income Management, our job is to help ensure that our clients are investing in gold moderately, and in a well-informed and educated manner.
Here’s a look at the ins-and-outs of investing in gold.
Gold: Pros and Cons
It’s important to recognize that over the course of time gold and other precious metals have been seen as inoperative. Precious metals are a commodity and are used in our day to day lives. For example, we use a lot of silver and gold daily in the jewelry we wear, the money in our pockets, the art on our wall and even in our technology like our iPhones, computers, and tablets.
Historically, they’ve been owned because they have an inflation edge to them. Nixon changed the way gold was valued back in the 70’s when he took us off the gold system. The gold system is a monetary system in which the value of a country’s currency is based on a fixed quantity of gold. In practice, central banks made sure that domestic currency was easily convertible into gold at a specific fixed price.
Gold fluctuates whenever we go through tough economic times and then goes back down when we’re out of tough times. Here’s a look at some of the pros and cons of investing in gold:
| Pros
• Hedge against inflation • Diversification • Tends to grow in value during bad economic times |
Cons
• Not an income producer • Volatile • Speculative; only worth what buyers will pay |
Gold Stocks aren’t the Same Thing as Physical Gold
Some investors like investing in gold stocks because they offer exposure to gold. However, it’s important to note that you are, in fact, investing in stocks and not actual, physical gold.
Gold stocks function like other stocks; essentially you’re investing in companies who mine or own gold on your behalf. Physical gold is a more stable investment that you yourself own and store in an IRA-certified account.
However, there’s a lot more that goes into whether you should invest in physical gold or gold stocks. Your investment goals and starting capital will impact which investment you choose:
- Gold Stocks: Also known as paper gold, gold stocks are similar in function to any other stock you would buy—you’re investing in a company in the hope that they’ll succeed and your investment will compound. Types of gold stocks include Gold ETFs, Gold Mining stocks and Gold Certificates.
- Physical Gold: When you invest in physical gold, also known as bullion, you actually own gold in the form of bars or coins. These bars and coins must be approved by the IRS in order to be put into a gold IRA. Types of physical gold include Gold Bars and Gold Coins.
Choosing which investment is for you is a discussion to have with your Fiduciary advisor and depends on your investment goals and starting capital.
Insurance Policies on Gold & Silver
If you’re still convinced gold is for you, Iowans can invest in funds that own gold, though many people who do invest in gold prefer buying the physical metal, even though it may mean additional costs for storage and insurance. People who invest in gold see the metal as a way to help diversify their investments and protect against inflation.
Gold, to those who invest, see it as an insurance policy, similar to buying a homeowner’s policy for a house that may never burn down. At the end of the day it gives them peace of mind by investing in gold but it’s important to know the risk that comes with investing in gold. The biggest risk is surprisingly not running out of money, but it’s the risk of their money running out of purchasing power.
What about Silver? It’s cheaper — selling at around $24.50 an ounce on March 22 (as opposed to gold at $1,946.00 an ounce) — and has been coined the “poor man’s gold.” Silver is far more volatile than gold, because it has more industrial uses, and when the economy expands and contracts, so does the demand.
In the second half of last year, gold fell about 10 percent, and silver dropped more than 24 percent. Silver also shares gold’s drawbacks: no dividends and higher taxes on gains. Silver is a market-timing product that requires investors to get in and out at the right time. To keep an eye on the current live prices of both gold and silver (and other precious metals), regularly check the Monex Precious Metals site here.
Final Thoughts
If you’re looking to help diversify your portfolio, investing in gold could be a great option. As you begin your research, you’ll want to decide whether physical gold or gold stocks are your best bet. If you are looking for an easy entry investment that generally follows the path of gold, gold stocks could be a great option. Physical gold, on the other hand, could be a great investment if you’re looking to have a safeguard in the event of an economic crisis where paper currency becomes invaluable.
It’s important to know what you’re dealing with when thinking about investing in gold, silver, and other precious metals. When it comes to investing, doing so sparingly is often a safer option. At Johnson Wealth and Income Management we suggest that if you choose to dabble in gold investing, do so if it’s something that you find interesting and if you have the time, patience, and resources to help build a sustainable business model from it at the end of the day. We’ll be happy to discuss your investment portfolio options any time with you.
Did you miss our podcast dedicated to investing in gold? Check it out here!
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