Pros and Cons of Investing in Gold

Stock Markets are meant to be at their peak and many analyst believe we may be heading to a GFC number two. Any unexpected event could send the economy into a tailspin, resulting in a lot of lost money. Because of fluctuating prices, many people consider investing in gold or other precious metals, especially Asian markets whose share markets are plummeting right now.

Investing in gold may be a good option for some, but a terrible for others. Here are a few of the pros and cons of investing in gold so you can make an educated decision.

Pro: Gold is safer.  One of the most common reasons people invest in gold is because people think of it as an alternative currency. Gold is a valuable you store until you need it (like during a financial collapse). Gold will (most likely) never become worthless. While gold does lose value, it does recover and never loses so much that it is considered worthless.

Con: Banks are competition. Central banks started to gobble up gold purchases in 2010. The demand increased when newer economies were building a budget stockpile. The gold helped to diversity currency holdings. Recently, the demand has adjusted do adjusting currencies. Additionally, reports that the Federal Reserve would begin tapering, pulling in more capital, have made gold investments a bit less stable. Some financial experts even suggest that gold purchases will drop by over 30 percent this year.

Pro: Insurance against inflation.  One reason gold is such a popular option as an investment option is because of its value as an insurance against changing inflation rates. Inflation means you pay more for less and affects everything from gas prices to insurance, groceries and sales tax. Because inflation is relatively unpredictable and some people worry that the government will slowly devalue money, they choose to invest in gold. The idea that no one can create gold is what makes gold so valuable, which is also why people view it as a safer investment option than traditional stocks and bonds.

Con: No commercial use.  The biggest problem with gold is the lack of options for using it. Gold is heavy, difficult to transfer and it usually costs a bit of money to store it. Gold is actually considered a negative-yield investment because of ongoing costs, including insurance. Despite this negative attitude towards gold, investors consider it safe and thus use it as an insurance policy for portfolios.

The lack of use for gold means you receive no income from gold investments, whereas you can earn healthy returns on stocks and bonds in a healthy economy.

Gold may be a safe investment, but only as insurance against a failing economy. Even under best of circumstances, gold is generally a better investment for individuals who already have a lot of money and just need extra insurance against a failing stock market. Individuals and families with lower to middle-income levels would likely fare better by investing in a money market account or stocks and bonds. While stock markets do rise and fall, over time your money will earn more money. If you purchase gold, all you have is the value of the gold.

Do you invest in gold or silver?

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1 Comment

  1. Jeremy Kwong-Law
    February 26, 2016 at 5:49 am — Reply

    interesting point about Central Banks buying up gold. I don’t really understand the true implication of this issue. If they stop buying, would demand for gold drop massively, hence pushing down price of gold?

    Bc since 2010, the Gold price has actually fallen a lot in USD terms. Does this mean Central Banks buying hasn’t had impact on price, or they actually helped stablise price? Not sure.

    Another interest consideration is that gold is a good asset to hold within a well diversified portfolio. It has a negative correlation to the sharemarket. So when the ASX is tanking, like in the last 3 months, Gold price tends to do well – Gold in AUD terms is up something like 18% since 1 Jan 2016

    Having gold protects the downside of the portfolio, although totally agree that in the long run, if you don’t care about short term fluctations, holding more stocks would give you a better return

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