Investing in Gold: An Alternate View




When economic times look rough and the stock market is shaky, many investors turn to gold as a safe haven. With inflation on the rise and the stock market hovering around all-time highs, some investors are turning to gold as a safe haven with an established track record of returns.


Gold is popular among savers and investors for a variety of reasons, and it possesses characteristics that make it an excellent alternative to standard assets like equities and bonds. They regard gold as a store of value, despite the fact that it is a cash-neutral asset. Some people consider gold to be an inflation hedge.


Let’s take a look at different ways to own gold and some risks attached with it:


Gold Bullion


Buying gold in bars or coins is one of the more emotionally fulfilling methods to own it. You'll get pleasure from looking at and feeling it, but if you possess more than a little portion of it, you'll face major disadvantages. One of the largest drawbacks is the need to safeguard and insure physical gold.


To make a profit, owners of physical gold are wholly reliant on the commodity’s price rising. This is in contrast to owners of a business (such as a gold mining company), where the company can produce more gold and therefore more profit, driving the investment in that business higher.


You can purchase gold bullion in a number of ways: through an online dealer or even a local dealer or collector.


Risks

If you don't keep your gold safe, the largest risk is that someone will physically take it away from you. The second-biggest risk occurs if you need to sell your gold. It might be difficult to get the full market value for your assets, especially if they are coins and you want cash immediately. As a result, you may have to settle for selling your assets for a significantly lower price than they would otherwise get on a national market.


Gold Futures


Gold futures are a good way to speculate on the price of gold rising (or falling), and you could even take physical delivery of gold, if you wanted, though physical delivery is not what motivates speculators.


The most significant benefit of using futures to invest in gold is the enormous level of leverage available. In other words, for a relatively modest quantity of money, you may possess a large number of gold futures. You may make a lot of money rapidly if gold futures move in the way you anticipate they will.

Risks

The leverage for investors in futures contracts, on the other hand, works both ways. If gold prices fall, you'll be obliged to put up large sums of money to keep the contract open (known as margin), or the broker will cancel the position and you'll lose money. So, while the futures market might help you gain a lot of money, it can also help you lose a lot of money.

Bottom Line

Investing in gold is not for everyone, and some investors stick with placing their bets on cash-flowing businesses rather than relying on someone else to pay more for the shiny metal. That’s one reason legendary investors such as Warren Buffett caution against investing in gold and instead advocate buying cash-flowing businesses.

GS_logo_FA.png