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Investing in gold is one of the most popular ways to protect one’s savings, if only against inflation. Investment gold is of interest not only to long-term investors, but also to traders looking to make money from the change in its price over a short period of time. What is worth knowing about gold investment?
Investing in gold – what does it consist in?
Paper money is a basic payment tool. It can be constantly produced and operates on the conventional principle of value. This means that it can gain, but also lose value, so it is not safe in terms of investment. Even in a single day, you may find that all the money you have accumulated has lost value heavily. When it comes to investing in gold, the case is different. However, investing in gold is not subject to any restrictions, so you should pay attention to make it profitable and safe.
What does the gold investment market offer?
Gold can be found in various forms. The easiest to acquire is certainly jewelry, as well as all kinds of numismatic and collectible coins. However, in this case one should be careful. The value of such items often lies not in the bullion, but, for example, in the age or workmanship. So this is a solution only for enthusiasts and experts.
A better option is to invest in gold in the form of investment bars and bullion coins. As for bars, this is the most common form of investment gold on the market. Bullion coins, on the other hand, unlike other numismatic coins, have only investment value. This means that they will never be collector’s rarities, as they are standardized and minted in large quantities. They have only the sample and the year of production.
How and where to buy gold?
You can buy gold from dealers, as well as from the state mint, although this is one of the most expensive sellers. For any large purchase, it’s always a good idea to ask about a discount. The price of gold is made up of the spot, which is the actual price at the rate, and the dealer’s margin.
What is investment gold? It is gold in the form of bars or wafers with a purity of at least 0.995, as well as gold that is represented by securities. In addition, investment gold is also coins that meet the following conditions:
- were minted after 1980,
- are or were valid legal tender in the country of origin,
- are sold at a price that does not exceed more than 80 percent of the market value of the gold contained in the coin.
It is possible to buy gold in the form of bars. In times when there is no war, it is easier to sell a gold bar than a coin, for the sake of greater demand for this type of gold. However, in the event of war, it can be a problem to pay with a bar, especially if it is heavy.
The cheapest gold bars weigh 1 gram and cost about $500-$100. A one-ounce bar costs about $1,000 – $1,500. Prices depend, of course, on the gold exchange rate.
A more secure investment in gold than bars, are gold coins. They are slightly more expensive (in this case, the effect of scale works – moments are lighter), but in case of war, they will be a better means of payment.
When deciding to buy gold coins, choose only bullion coins. Among the most popular are the Canadian Maple Leaf, the Austrian Philharmonic and the Australian Kangaroo. The advantage of a bouillon coin is that it is classified as legal tender.
Paper gold, or ETFs, and other instruments that give exposure to gold prices
Investing in gold is not just about physically buying bullion. It is also possible to invest in a financial instrument that will allow the investor to earn money on the gold prices swap. For this, a forex account or a brokerage account is needed, and the whole transaction is almost identical to any other transaction made on the stock market (read also: Forex investments and Online forex).
If the investor wants such an investment in gold to be medium or long-term, a good choice would be to buy units of an ETF that is fully backed by bullion, such as the Sprott Physical Gold Trust. In this case, the investor is dealing with funds that actually buy bars and bullion coins, and even allow you to request the release of physical gold. In practice, this privilege extends only to wealthy investors, as no ETF will pay out funds in the form of 10- or 20-gram bars.
When it comes to investing in gold, an investor can opt for one of the ETFs that mimic changes in the bullion’s market price, but are usually only marginally backed by physical gold. Instruments that are not backed by it at all are exchange-traded notes, so-called ETNs. This type of fund has a lower management fee than a fully hedged fund, but it should also be assigned a slightly higher risk.
Investing in gold can also be done through futures contracts, particularly gold CFDs, which also do not involve the physical purchase of gold, but allow you to profit from changes in its price. In addition, they give the opportunity to play for increases, but also for decreases in the price of bullion, as well as to use leverage. Usually it is short-term investors, including day traders, who use them to open and close positions on the same day.
Investments in gold can also be made by purchasing shares of a specific investment gold producer or mining company. However, it is worth bearing in mind that although their prices move in the same direction as the price of the metal, they have a much higher dynamics. Therefore, an interesting alternative may be to purchase ETF units on shares of many companies that are related to the gold market and are characterized by smaller fluctuations in value, as well as lower investment risk.
Physical gold or paper gold – which to choose?
Before an investor finally decides which type of gold investment is best for him, he should analyze the main advantages and disadvantages of each. Which gold investment is more profitable?
Advantages and disadvantages of bars and bullion coins
The key advantage of investment gold is that it allows you to enjoy all the properties of physical gold. It is characterized by high durability, as well as being easily portable and can be monetized in any part of the world without any problems. In addition, gold bars and coins are kept outside the system by the investor, so to speak. He can store them wherever he likes and doesn’t have to worry too much about the actions of financial institutions or the government.
It is worth knowing that currently in some countries gold can be bought anonymously up to the value of 15,000 euros. Investment gold also has a very important advantage, which is related to tax aspects. According to regulations and interpretations of tax offices, gold can be considered not as an investment, but a tax-free way of storing assets. In order to avoid paying tax, the sale of a gold coin or bar must take place at the earliest six months after buying it.
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As for the disadvantages of investing in physical gold, the need to store it, which usually generates additional costs. If an investor wants to feel safe, he usually has to rent a safe deposit box or a safe. The second disadvantage is the certain problematic nature of the purchase transaction, as well as the subsequent resale of gold. What disadvantages also include the fact that it pays to buy only gold of sufficiently large weight, at least 1 ounce, which is associated with a considerable expense, in the order of $2,000.
Investing in paper gold
As for this type of investment in gold, the pros and cons in this case look a little different, depending on the specific instrument, based on gold. Here the pros and cons that are common to all and that distinguish them from physical gold will be presented.
As for the advantages of gold-based instruments, they can include the ease of transactions and the lack of costs and problems that are associated with storage. There are, however, transaction and account maintenance fees. With the help of them, active investors can freely apply various investment strategies, as well as flexibly respond to the changing market situation. In addition, paper gold makes it possible to conveniently enter the market with little capital under identical conditions as wealthy investors.
As for investing in paper gold, it also has some disadvantages. First of all, it does not allow you to take advantage of the physical properties of bullion, which entails other disadvantages, such as a complete lack of anonymity, or lack of full control over the investment. There is also the risk of the broker and the exchange, as well as the banking system. In addition, in order for the market to work, a technical and organizational infrastructure is required. An investor in such gold can only invest under established rules and with the help of special investment platforms. In addition, it is treated like any investment, so it is associated with the need to pay tax on capital gains.
When is it worth buying gold?
The price of gold rises primarily in times of crisis. For this reason, gold is best bought at the end of prosperity. During the period when the economy is growing, it is worth making investments. Buying gold is a long-term investment, with the exception of ETFs. People who bought gold in the early 1980s had to wait almost 30 years for increases.
The price of gold rises when interest rates are kept low. Along with the rise in interest rates, investors move their capital into bonds and bank deposits, resulting in a drop in the price of gold.
Despite the stability of this bullion, there are times when it loses value, such as when inflation falls. Therefore, the most favorable for a person who invests in gold will be analogous moments of high and rising inflation.
It is also worth deciding to buy gold at moments of global conflicts and crises. Then financial uncertainty grows in societies and the demand for bullion increases. The rightness of investing in gold, is also affected by the situation of the US dollar. If its position falls, capital moves, for example, towards gold. After all, the dollar is considered one of the safest currencies in the world.
What periods are favorable for investing in gold?
As a rule, favorable to invest in gold are:
- Periods when real interest rates are low or negative,
- Periods of high inflation, and preferably hyperinflation,
- Periods of social and political unrest, when concerns about the viability of the international financial system are growing,
- Periods of financial market turmoil, when prices of stocks, as well as other risky assets, fall. Investment gold is seen as a safe haven.
Investing in gold is certainly not conducive to periods of rapidly falling inflation and high real interest rates – this is when investors prefer to hold funds in deposits and government bonds.
How much does gold cost?
The price of bullion depends on the value of gold in London at the LBMA Gold Price. Its value is announced twice a day on each working day in the UK, as well as the ratio of the dollar to the zloty. Tracking this type of Information makes it possible to accurately analyze the reasonableness of deciding to invest in gold.
The price of gold also depends on the fact that it has limited resources, and the cost of mining gold deposits is increasing. The amount of bullion that remains to be mined will decrease, which means its prices will increase all the time. Therefore, it can be concluded that despite unfavorable temporary turbulence, investments in gold will be profitable.
Is it worth investing in gold?
There are many reasons why investing in gold may turn out to be one of the best investment decisions.
Hedging against crisis and inflation
These days, gold is one of the best ways to invest money. This bullion is appreciated especially during periods of inflation and crisis. When money falls and savings melt down with it, gold holds its value all the time.
The decline in the value of money is mainly related to the massive printing of money by the state. Investing in gold has always been a good hedge against inflation. It is a matter of time before inflation breaks out. Then gold will adjust its value to the money supply and become more expensive. Investment gold is one way to save for retirement.
Diversification of the investment portfolio
The key to success is the proper allocation of invested capital. For this reason, it is also worth betting on investments that are not polarized with stocks and other financial instruments. The history of gold shows that stock prices and gold fluctuate independently of each other. Therefore, by adding this bullion to your investment portfolio, you can achieve higher returns with lower investment risk.
Growth in emerging economies
Rising demand in emerging economies for gold in recent years, has boosted global demand for gold. Along with the pattern of prosperity, demand for this bullion will increase. In Asia, gold is the most appreciated means of storing wealth. In recent years, China has overtaken India as the world’s largest buyer of gold coins.
Investing in gold in practice
Typically, in addition to its financial value, gold also has emotional value. It is very often chosen as a valuable keepsake or gift. It is also inherited from generation to generation and is treated as something very valuable all the time. To this trend, therefore, it is worthwhile to add knowledge so that investing in gold is well thought out and involves a large profit in the future.
However, it should be remembered that earning money on gold is a long-term process. A relatively satisfactory return on costs, as well as income from investments, may not appear until a dozen or even several decades later. The financial contribution is usually considerable. Investing in gold will therefore not be a suitable solution for everyone. It is recommended for those who have relatively large assets.
How much can you earn on gold?
This question is certainly asked by everyone who is interested in this type of investment. First of all, it should be remembered that, as with any investment commodity, gold is also characterized by relatively high volatility. An investor can hit a very large period of price declines, and if his time horizon is short, he can lose on gold.
However, if an investor plans to hold gold in a portfolio for the really long term, then investing in gold and getting satisfactory earnings is possible.
What effect does the exchange rate have on gold investment returns?
Gold is priced in the market in dollars. When deciding to buy gold, in fact, the investor is also partly counting on an increase in the value of the dollar. In extreme cases, it can even happen that gold as a commodity will increase in value, and the investor will still lose. Unfortunately, unfavorable changes in the market can eat up all the profits.
Is it possible to buy gold anonymously?
When deciding to buy gold for larger amounts, the investor will never be anonymous. Gold can only be purchased this way for cash up to 10,000 euros and non-cash for 15,000 euros. However, it’s hard to make an anonymous transfer from your own bank account. As for practice, it is often the case that dealers have their own restrictions and can ask the investor to provide personal information.
The situation is similar in the case of sales. It can happen that even when selling a single coin, the investor will be asked to provide data. Therefore, if he is very keen on anonymity, he should make sure by phone beforehand that such a possibility definitely exists.
Fake gold – how to guard against it?
Investing in gold is also related to knowledge. If the dealer from whom the investor wants to buy gold has been in operation for several years and runs a stationary store, then one can be more confident about his honesty. In such a stationary store, an investor should be able to buy the most popular gold coins for cash.
The key rule of safety is to buy for cash, on the spot, from hand to hand. Of course, shipping is practiced, for the sake of convenience, but advised against. Buying gold online always involves some risk. The safest way is to purchase gold from a bank or mint.
It is riskier to buy a gold bar that weighs 100 grams than one that weighs 1 oz. Bars that are larger are easier to counterfeit. Bullion coins are also counterfeit – mostly in China. Reputable dealers have to take care of their customers, which is why it is recommended to buy gold from them.
It’s also worth asking the company if it has a device that can detect a counterfeit. Large companies have a spectrometer that is designed to test coins, which eliminates the possibility of buying a fake. To further increase security, it’s best to buy coins of current vintage.
On the other hand, the investor’s own test for the genuineness of gold can be done with a magnet. Unlike metals, gold is magnetically inert. If, after attaching the magnet to the coin, the investor senses an attraction, he is undoubtedly dealing with a fake. It’s also worth knowing that there are apps on the market to check the authenticity of coins.
Where to store physical gold?
Physical gold has the disadvantage that it is susceptible to theft, so it is worthwhile to properly protect against this. In what way?
- A gold safe – allows you to secure the gold kept at home. It is worth choosing a safe that is certified and with the appropriate security class – the amount of possible insurance for the safe also depends on it,
- Safe deposit box or bank box – this involves renting a safe that belongs to a bank or a company that deals with such services. The safe is located at their headquarters. Buildings that are located at the headquarters of such an institution usually have additional security features, which further increases the level of security,
- Safe at the dealer – it so happens that the dealer offers to store the purchased gold in his own vault.
How is gold insured?
Gold that an investor keeps at home can, of course, be insured. However, there is no insurance on the market specifically designed for people who own precious metals. Insurance companies will reimburse the investor if everything on his property is destroyed or stolen. However, this is not the whole, but part of the losses. Such amounts reach tens of thousands of USD. This is too little, even if the investor stores several ounces of gold. In addition, most general insurance policies exclude gold bars, so only jewelry and gold coins are insured.
However, if an investor keeps gold in a safe, he can simply insure his safe for a certain amount. Then no one will be interested in what was in it.
How to sell investment gold?
Investment gold can be sold:
- Specialized enterprises – jewelers, precious metal dealers, mints, exchange offices and some numismatic stores,
- Private individuals.
However, it is worth remembering that exchange offices, pawnshops and jewelers charge high and unprofitable margins. It is best to choose reliable companies that deal in gold. Often sales can be made both stationary and online. On the other hand, websites usually offer a price list, so that the seller will know in advance the amount that can be received for a given bullion. Photo-based pricing, on the other hand, is a very convenient service.
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Investing in gold undoubtedly has many advantages. Having physical gold, the investor is not interested in world crises, inflation, stock market declines or other periods when many people lose their savings. A gold holder can set his mind to investing and speculating that the future price will be higher than the current price. An investor may also want to hedge capital and presume that in the long term the value of gold will maintain its price.