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COVID-19 has brought on a lot of changes. It is now extremely challenging to find a strategy that maximizes profits while minimizing risks. An ideal investment strategy will find the right balance between profitability and risk.
Thankfully, there are still a few assets that haven’t been affected by anything over the long run. One of such investment assets is gold.
However, not everybody is eager to invest in gold and that might be the case with you. Some people might find this investment strategy old or extremely time-consuming.
However, if you are patient and learn to do the right amount of research, this yellow metal can be an excellent addition to your portfolio, especially in these times.
Here is everything you need to know about investing in gold and how to add gold to your portfolio today.
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What Makes Gold Valuable?
One of the main reasons for the continuous high valuation of gold is that currencies have been historically linked to the gold standard. This yellow metal was perfect for coins and jewelry in ancient times due to its malleability.
With the rise of paper currency, the currency notes were backed with gold. The gold standard is no longer there but the historical importance of gold in our financial system keeps it valuable.
Almost 50% of the annual demand for gold is for jewelry. 40% of the annual demand goes to physical investments including gold bars and coins. Physical gold is preferred by most financial institutions and investors.
There are also exchange-traded funds that invest in gold for their investors. The remaining amount of gold is consumed by the medical and technological industries.
Why is Gold a Good Investment?
Gold is an excellent choice for diversifying your portfolio. Usually, gold performs exactly opposite to traditional investments such as bonds and stocks. Gold generally rises in value when these traditional investments are in the negative.
This trend is the reason why many investors consider gold to be a safe bet thus making it valuable for a diversified portfolio.
To understand the importance of gold, just consider the price of gold throughout 2021. 2021 witnessed the highest price for gold in the last seven years.
Many new investors might not want to consider gold as it doesn’t generate persistent cash flow which is the case with stocks or real estate. Not everyone understands the liquidity of gold.
There is a high demand for gold which means you wouldn’t have any trouble buying or selling it. When you compare this aspect with other investments such as rare art or collectibles, gold looks like a much more attractive investment.
Ways to Invest in Gold
Most people think of buying gold jewelry or gold coins when it comes to investing in gold. However, you should know that there are several ways for you to buy and sell gold.
Here is a list of the best ways to invest in gold:
Gold IRAs
Setting up a gold IRA allows you to get tax benefits while enjoying ownership of physical gold. Several gold brokers offer gold IRA programs by partnering with specialists who can help you set up a self-directed IRA for investment in gold.
These specialists will make sure that the gold you buy is IRS-approved. They will also help you make sure that you’re able to complete your gold IRA rollover without any issues and provide all the required assistance during the process.
These self-directed IRAs keep physical gold and that gold needs to be stored in an IRS-approved facility.
You may add more gold to your self-directed IRA but you will have to pay taxes and penalties if you want to sell until you reach the age of 59.5. Once you reach the age of 70.5, you are legally required to take minimum distributions from a gold IRA.
If you want to invest in gold for a retirement investment portfolio, the self-directed IRAs are the best option.
Gold Bullion
In simple terms, it means pure gold. Gold bars are the most common example. The bars need to be certified for purity and weight, and in most cases will also have a serial number due to security. These can be in different sizes.
This form of gold has certain drawbacks. Proper insurance and a secure location are needed to keep this investment secure. Also, it might not be as liquid as other forms of gold.
You will need to make efforts to find buyers to sell a bar of a particular size. However, many investors still prefer this method for investing in gold as they find it to be highly rewarding.
Gold Mining Companies
An interesting way to combine gold and traditional stocks is to invest in gold mining companies. Investors can indirectly profit from gold without buying or selling physical gold by investing in a company stock involved in the business of gold.
This type of investment has lower risks as a variety of factors, other than the price of gold, affect the share price. Investors need to perform proper research to find the right company for investing their hard-earned money.
The mining industry has a lot of risks that can lead to impact profits and, in some cases, there are also ethical concerns. This is why you should always do proper research before choosing a company for investing your money.
Gold ETFs & Mutual Funds
There are mutual funds and exchange-traded funds that invest in gold on behalf of investors. Each share in these funds is equivalent to a particular amount of gold. Investors can buy and sell these shares like stocks.
It is one of the better ways to add gold to your portfolio as you can invest in gold without worrying about the cost of a tangible asset such as the cost of security or insurance.
You have to pay fees when you buy or sell mutual funds or ETFs but the fees are much lower in comparison to the management fees of other assets.
You need to know that mutual funds and ETFs that deal in gold also deal in other commodities and there are hardly any firms dealing only with gold. It’s a good thing if you want to diversify though it may involve making efforts to learn about other markets.
This is why you should research various funds when you want to invest in gold through mutual funds or ETFs.
Financing Firms
It is another way to invest in gold through stocks. These companies have an interesting business model. They provide financing to mining companies in exchange for the right to buy gold or any other commodities they produce in the future.
In simple terms, they get profits in gold in exchange for financing mining. This is the kind of investment where investors also need to learn about risks associated with gold mining as well as with companies that are involved in this business.
Since extensive research is required to find companies involved in this business model, it could act as a bigger entry barrier for some.
Gold Futures Contracts
As the name implies, these contracts allow investors to buy or sell gold in the future. Each futures contract is equivalent to a particular amount of gold. The payout could be in physical gold or a dollar amount depending on the contract specifications.
It might involve a lot of money and this investment type is the best for investors with access to a huge amount of capital for buying high-value contracts.
Investors may also invest in gold futures options. This option allows investors to buy a futures contract for gold at a particular price and at a particular time.
Buyers can leverage their initial investment with the help of options though they have to pay the underlying value of gold if they want to own the full option.
Futures and options contracts are volatile which makes them a more difficult form of investment as compared to alternatives.
Gold Coins
Gold coins are extremely popular as can be seen in advertisements and infomercials. It is a well-known way of buying and selling gold and is much more convenient as compared to gold bars due to their smaller size.
Gold coins can be bought from private dealers or collectors and sold in time to earn a profit. Most cities have dealers for buying gold coins. It is one of the best ways to get started for beginners when it comes to investing in gold.
On occasion, you might find gold coins with a higher value as they are collectible. It simply means that the coin has a greater price than the value of the gold contained in it.
Casual investors typically stay away from collectibles as they like to invest in widely available coins. The Canadian Maple leaf and the U.S. Eagle are a few good examples.
Gold Jewelry
As a form of investment, jewelry is likely the most prevalent type that is bought and sold regularly. Not many people take it seriously. However, it is one of the most beginner-friendly ways to get started as buying jewelry is extremely easy.
As per Investopedia, almost half of the global gold production is used for making jewelry.
Jewelry is sold in different purities and purity of 14K or above is considered a worthwhile investment in gold. Buying jewelry is easy but it also has some drawbacks. You might not be able to get the right resale value.
In simple terms, it is not as liquid as you would like it to be.
What Makes Gold Good for Investors?
One of the primary reasons for investors to buy gold is to diversify their portfolios and safeguard their existing investments.
Since gold usually moves in an opposite direction to bonds or stocks, it offers an excellent opportunity to mitigate risk. Here are other reasons for investor’s preference for gold:
Highly liquid — Even though it’s a physical asset, there is no problem with the liquidity of gold and you shouldn’t have any problem converting it to cash.
Value storage — It’s a tangible asset that allows investors to store value. Its tangible nature makes it attractive for investors who are looking to diversify.
Good returns — As an investment, gold has provided excellent returns on a long-term basis. It may not outperform other investment classes but the overall returns are still attractive.
Safe investment — Since gold performs opposite to bonds or stocks, it increases in value when there is an economic downturn and this is why investors buy gold to reduce the risk in their portfolio.
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I started BMOGAM Viewpoints as a way to compile all my views on investing in one place. I own my home, have some real estate, and own a few stocks like most people, but what really drives my interest in investing is I have a strong love of precious metals, especially gold.
