How sensible is it to invest in gold? There is no blanket answer to this frequently asked investor question. Much more depends on what you personally expect from an investment in gold.
In this second part another 10 experts give their blunt opinion about investing in Gold. They talk the pros and cons of buying gold, each from their own perspective. Read part 1 here.
1Physical Gold and Silver are like an “emergency kit”
By Chris Vermeulen – Chris Vermeulen is the founder of Technical Traders Ltd. He is an internationally recognized technical analyst, trader, and author of the book: 7 Steps to Win With Logic.
There are really only a few short and simple answers to the question why you should consider buying Gold? Investing in Gold provides a hedge against risk, capital preservation and opportunity for returns.
First, Gold, historically, has been and will continue to be the basis of physical wealth for the foreseeable future. Currently, Gold and Silver are relatively low cost compared to other assets offering similar protection. As of right now, Gold and Silver are nearing the lowest price ratio levels, historically, that have existed since 1990. This means, the relationship of the price ratio for Gold and Silver are comparatively low in relationship to how Gold and Silver are priced in peak levels. So, right now is the time to be acquiring Gold and Silver as a low price hedge against another global crisis event or market meltdown.
Second, the fact that the Gold and Silver price ratio is historically very low (meaning they provide a very good hedging opportunity at historically very low price ratio levels) also means that cash can be traded for physical gold with very limited risk and provide an excellent hedge for inflation, global market crisis events and as long term investments. Taking advantage of the current market conditions, one has to be aware that crisis events do exist and present a clear risk to future equity investments. One could decide to risk further capital hedging with options or short positions as risk becomes more evident, but these are inherently more risky than a physical Gold or Silver investment. Physical Gold or Silver, especially rare coins which include greater intrinsic value, can provide real capital, real gains, real hedging of risk and real return – whereas the short positions or options are only valuable if the trade is executed to profit.
Lastly, Gold and Silver are very limited in supply on this planet and, unless society decides that Gold or Silver is absolutely worthless as a substance, will likely continue to increase in value. News that China and Russia are acquiring hundreds of tons of gold each year in preparation for a gold based currency are another set of reasons that you should consider starting your own physical hoard of precious metals. The most important thing for you to understand about owning physical Gold and Silver is that it is a protective investment that can be liquidated or resold at almost any time in the future. It can be traded, held, secured and transported easily. You can physically take possession of your Gold and Silver and be assured that through any banking crisis, global market crisis or major global event, you have enough physical precious metal to operate in a crisis mode and likely attain great wealth/gains in the process.
Think of physical Gold and Silver like an “emergency kit”. You hope you never need it, but when you do need it, you had better be prepared and have set aside some physical holdings before the crisis event happened. Out here in California, we keep “Earthquake Kits” with emergency supplies, water, lanterns, food and other essentials. Well, guess what is included in my Earthquake Kit? Yup – Gold and Silver in proper quantities that I could barter and trade for items that are essential.
The point of my post is that I can think of no reasons why anyone would not want to attain some physical Gold and Silver at today’s prices to protect against known risks, provide a hedge against inflation and crisis events and to protect wealth from what we all know will happen in a crisis event – the banks will close or limit cash availability (think of Greece). So, it is really up to you to determine if and how you want to prepare for what could happen in the future. Will you have your “emergency kit” and be prepared or not?
2Diversification is key
By Ben Reynolds – Ben Reynolds is CEO at Sure Dividend. Sure Dividend is an investment information and newsletter site dedicated to high quality dividend growth stocks.
For most people, the purpose if investing is building up a nest egg large enough to live off in retirement. In a perfect world, your portfolio’s growing dividend income would more than cover your expenses in retirement. In this ‘best case’ scenario, there’s no need to sell holdings as dividends alone cover expenses.
Unfortunately, this is often not the case in the real world. When portfolio income isn’t sufficient, you must slowly liquidate your portfolio. This presents a serious problem – forced selling.
When you are forced to sell, you don’t get to pick when you sell. You sell to get cash, not because it’s a good time to sell. This can cause selling at inopportune times – like selling stocks in March of 2009.
To counteract forced selling, investing in uncorrelated assets is essential. If your stock holdings are down big due to a recession it’s the worst time to sell. Instead, you can sell an uncorrelated asset which might be up.
Again, reality makes things difficult. There are very few asset classes that are uncorrelated with stocks. The two largest are long-term government bonds and gold.
Interestingly, stocks, long-term government bonds, and gold are all uncorrelated with each other – meaning you get big diversification gains from them. The Permanent Portfolio best utilizes these uncorrelated assets to form an easy-to-implement strategy.
Perhaps the greatest benefit of investing in gold is taking advantage of its unique investment properties; namely, that it is not correlated with stocks or bonds. This is especially important for investors who will be slowly liquidating their portfolios as it provides a hedge against stock and bond market declines.
3“You should not invest more than 10% in gold”
By Basavaraj Tonagatti – Basavaraj Tonagatti is Certified Financial Planner. He shares tips about finance & investment funds in India on his personal finance blog.
When we look at historical price data, gold as an asset class can result in short-term losses, but can counteract equity volatility as well. Hence, I will never invest too much in gold. For reasons of diversification and as a hedge against price movements of other assets, one should invest in gold no more than 10% of the overall portfolio.
The problem with gold is that we Indians still try to invest in physical gold. We hardly experiment with related products like Gold ETFs or other forms of gold. Hence, to maximize your profits by investing in a gold product, you need to make sure what returns to expect, take its volatility into account and you need to decide for how long you want to hold your assets.
4“Owning gold takes away the need to predict the future”
By Physical Gold Ltd – Physical Gold Ltd is one of the leading gold dealers in the UK. The physical gold shop offers guidance, expertise and market leading prices for coins and bars.
There’s a huge raft of benefits which can be gained from investing in gold. However, there are two main reasons you should consider gold investment, above and beyond all others.
1. As a store of wealth
This may not sound exciting but it’s one of the most important, yet overlooked aspects of gold. For some time now, global interest rates have been near to zero. The main consequence of this is the low interest rates we receive on our cash. While cash in the bank has traditionally been seen as a prudent allocation of liquid assets, it now loses value every day. That’s because the percentage you receive falls well short of the inflation rate (which is on the rise). So every day your cash is left in the bank, it is actually able to buy less and less.
Throughout history, the gold price has always more than kept pace with inflation. So, switching money from low-interest bank and ISA accounts into physical gold coins, will protect the value of your money from the erosion that inflation can bring.
2. Portfolio Insurance
We’d all like a crystal ball to predict the next market crash, or even the lottery numbers! But taking control of your future, rather trying to get lucky is the more sensible and safe decision.
Owning gold takes away the need to predict the future. That’s because it has been regarded as the world’s safe haven asset for hundreds of years. So whenever there’s political or economic instability, demand for gold increases, pushing up its price.
In other words, if Brexit turns out to be a huge problem, and other countries follow the UK, then gold will benefit. If another banking crisis emerges or a credit bubble builds, both a question of ‘when’ rather than ‘if’, then investors will flock to gold in droves.
This means that owning gold now will protect you from market downturns in the future, regardless of when they happen or how severe they are. Gold is known as portfolio insurance as it rises in value when most other assets fall. This protects the overall value of your pension or investment portfolio, and provides you with the certainty you seek for your future.
How do I get started?
As market leading exerts in gold and silver investment, we reveal the 7 Crucial Considerations before you buy gold or silver. Ensure to read this cheat sheet before you buy gold or silver.
5“Gold is a counterparty risk-free investment”
By TaxGuru® – TaxGuru is an all-round tax service company and offers a complete tax solution for C.A., C.S., ICWA, Tax and Finance Professionals in India.
Gold isn’t just a valued ornament but it’s also a very well-known form of investment. Most of the people treasure gold for ages passing it to their generation in form of asset. There are several benefits attached to investing in gold. Some of the benefits include:
1. Simple and easy mode of investment
Gold has undergone centuries as a sign of wealth and the most of the benefits attached to gold begins with for it is the simplest form of investment. It is relatively scarce, indestructible and cannot be manufactured. Gold is the best alternative to the complicated investment products available today.
2. Low volatility
There is a limited supply of gold in the world that generates exponential price rise when the demand for gold increases. The gold production cannot rise simply for meeting the increased demand, hence the demand for gold drives the prices higher naturally. This also minimizes the risk of devaluation, since lower prices would attract more demand for gold, which would again fuel the price rise.
3. No risk of counterparty
Gold in its physical form provides its holder a counterparty risk-free investment option. It is specifically pertinent in today’s financial world, where money isn’t safe even in bank accounts. It also eliminates the counterparty exposure which subsists with gold stocks, options, and futures.
6“Gold is one of the best ways to diversify your investments”
By Randy Kurtz – Randy Kurtz, MBA, BSBA, is the chief investment officer of Betavisor, LLC. He has been profiled in Forbes, The New York Times, and The Wall Street Journal.
If you believe an asset will behave differently than your portfolio, the question is “How much of it should I own?” rather than “Should I own it?”
Gold is a must in your portfolio, almost regardless of your goals. Historically gold has had rather low, or negative, correlations to the U.S. stock market (which comprises the majority of many investor’s portfolios).
Did you know that since 1970, a portfolio comprised of 50% in gold and 50% in the S&P 500, rebalanced annually, would have had similar returns and less risk than a portfolio 100% in the S&P 500, with less risk.
The whole point of investing is to diversify away as much risk as possible. Gold is one of the best ways to accomplish this. Diversification is done through adding assets with low correlation.
7“No way the price of gold will go down permanently”
By Anand Vijayakumar – Anand has been blogging about banking and finances for about 8+ years and works in Singapore as a full time IT professional.
Gold, the shiny yellow precious metal has been a popular avenue for investment for Indians since the day we found it. Our forefathers saved up their life’s earnings as gold and so did our parents. Considering the fact that there is only a limited quantity of gold that the earth has and the demand in the global markets, there is absolutely no way the price of gold will go down permanently – EVER…
Of course, based on global demands the price may fluctuate a little bit but the constant upward trend in price will continue until the day some other item captures man’s interest like this shiny metal.
In today’s world we can invest in gold bars, coins, jewelry, ETFs and even mutual funds that invest in gold mining & related companies. I prefer the ETF route as it is an inexpensive way of investing in gold without the risk of having to physically safeguard the metal from loss. If you have access to safe keeping facilities or if you are someone who doesn’t trust others you can buy physical gold bars and keep them safe. Investing in gold via the jewelry route is inefficient as we usually end up paying around 5-10% (sometimes even more) of the cost of gold as making charges & wastage to the jeweller pretty much eroding whatever profits you could potentially make in the next 1-2 years.
Either ways I would very much recommend you to consider gold to be around 5% of your net investment portfolio considering all this – in whatever medium you feel comfortable. In short term gold prices may go down which may impact immediate liquidity hence the suggestion to limit exposure to 5%.
8Lyn’s golden tip: Generate income from your gold position
By Lyn Alden – As the founder of Lyn Alden Investment Strategy, Lyn provides market research to individual investors and financial professionals.
Gold is an asset class that doesn’t have significant correlation to equities or many other asset classes. We’re eight and a half years into the third longest bull market we’ve ever had, with the second highest stock valuations in U.S. history and arguably the lowest volatility we’ve ever seen.
It’s not a bad time to have some money in asset classes that do well when markets fall or when the perception of risk rises, because it’s important to be positioned for what comes next rather than what’s happening now. Gold is still one of the best investments for this purpose.
The drawback of gold is that it doesn’t pay dividends or interest, and there’s an expense associated with owning it, whether it’s shipping, security, authentication, or expense ratios for precious metal funds.
For this reason, I like to own shares of the GLD ETF, and then sell covered call options on my shares to earn option premiums. This helps generate income from my gold position while I own it.
9“Gold is a speculative investment not unlike Bitcoin”
By Jason Howell – Jason Howell Company is an Investment Adviser registered with the Securities and Exchange Commission in the State(s) of Virginia.
Gold is a speculative investment not unlike Bitcoin or baseball cards. So
it can be a hedge against other kinds of investing but there is no real
worth beyond what other people think at any specific moment in time.
10“Gold is not the sole reason that makes you wealthy”
By Derek Sal – After Derek got completely out of debt (house and everything) his life has been amazing ever since. Now his main passion is helping you ditch your debt and become ultra-wealthy!
Invest sparingly. Gold is incredibly volatile and typically is not the sole reason that someone becomes wealthy. They become wealthy because they work hard and live frugally – and then they invest their surplus into something that will generate even more money – like rental properties or their own business venture. Gold is good, but I personally keep it at 5% of my net worth or less.
11“It is always advisable to hold some Gold”
By Karan Batra – Karan Batra is a visiting faculty member at the Institute of Chartered Accountants of India (ICAI). He is founder and CEO of CharteredClub.com.
Gold is always considered as a safe heaven as there is no risk of Gold become worthless in times of financial crisis or political uncertainty unlike fiat currency or any other asset which bear a credit risk.
Due to safe heaven status of gold, it is always advisable to hold a proportion of one’s assets in the form of gold. Gold can be held in various forms like Jewelry, Gold Coins and Bars, Gold ETF’s, Sovereign Gold Bonds etc.
In case you are in India and you wish to get the maximum returns from Gold, holding it in sovereign gold bonds is more advisable as compared to holding it in any other form. Sovereign Gold Bonds are better than any other form of Gold because of the following reasons:
First, there is no Tax on the sale of Sovereign Gold Bonds as compared to other forms on which Capital Gains Tax is levied at the time of sale. Sovereign Gold Bonds are not considered as a Capital Asset and therefore No Capital Gains Tax is levied on the sale of these bonds.
Second, the Indian Government would also pay additional interest of 2.5% p.a. over and above the price appreciation in the value of Gold.
Lastly, there is no Goods and Services Tax on purchase or sale of Sovereign Gold Bonds.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of InvestaWeb.