A solid investment portfolio should include a wide variety of assets with both short-term and long-term value. Since the economic collapse in 2008, wealthy individuals worldwide have been diversifying their investment portfolios by including assets with long-term value and less systemic risk such as gold and silver. Fads come and go with financial instruments gaining and losing their value in the short-term. When the wise carefully consider the asset that has always retained its value over the centuries, they think of gold. Gold’s purchasing power has doubled since 1920. The saying back then was that one ounce of gold could buy a man a nice suit. Well today that same ounce of gold can buy 2 men’s suits. Can you say the same about the dollar or any other type of investment?
Precious metals are held by governments and banks in high-security vaults because they are the foundation of the entire global monetary system. Nations, like Venezuela and Germany, have requested the return of their gold from the United States. Swiss citizens have signed a petition supporting gold-backing for their paper currency. Even Texas has demanded that its gold be returned from the Federal Reserve. Why?
Gold is a real asset with value. Originally, all United States dollars could be redeemed in physical gold and silver. A dollar bill is really a receipt. It grants you the right to the real asset. Do you want the paper IOU or the real thing?
Gold Stands the Test of Time
From 2000 to 2011, gold was in an impressive bull market outperforming all other asset classes. Despite recent downturns, the precious metals are still valuable and in high demand. In India, gold and silver are exchanged during wedding ceremonies and festivals.
China has increased the development of its Hong Kong metals exchange. Many see a low gold price as an opportunity to buy for the long-term.
In the precious metals industry, the wise sell at the peak and accumulate in the trough. Billionaire Jim Sinclair has stated his intention to buy more gold at lower prices. Many see low gold prices as an opportunity – coinage, industrial production and jewelry always need gold. Moreover, even with the recent price decline, the United States Mint is recording record gold Eagle coins sales.
Some are noting a separation between the paper spot price and the real physical price. Gold and silver remain in high demand. High demand leads to high prices.
Eventually, all paper assets become worth “Zero.” Just look at the proud city of Detroit. In the 1950s, it was the symbol of prestige, power and money. In 2013, it is insolvent. All those holding Detroit municipal bonds might lose their entire investment.
Many of these bankrupt municipalities are telling bond-holders what percentage of their investment they “might” get back. Do you want your investment to be that uncertain? Wealth is not built on uncertainty.
Internationally, nations are printing paper currencies as fast as they can. This increases the supply of money and decreases its value. This can lead to inflation and hyperinflation.
Gold is not just a short-term investment. Gold is a long-term hedge against economic uncertainty and unstable currencies. There are many ways to invest in gold including the following: stocks, ETFs, mutual funds, coins and bullion. Each can be a good way to benefit from gold price increases. Let us consider the pros and cons of each of these gold investment strategies.
Gold Mining Stocks
Gold mining stocks are the most direct paper investment in precious metals. Each mine is planning on attracting capital investment based on the price of a unit of gold.
Pros
Those who believe that “gold is money” would compare a mine to a bank. When gold prices increase, there is a multiplier that increases the value of these stocks tremendously.
Cons
Government regulations, scientific exploration, environmental protection and capital investment can delay the opening of a mine for a decade. Mines collapse and can be involved in labor disputes. Prices might change dramatically during the planning stages of opening a new gold mine. It is very difficult to increase mining supplies rapidly.
Exchange-Traded-Funds (ETFs)
The growth of the Exchange-Traded Fund (ETF) has been explosive for silver and gold. This is an attractive way to measure the price of the precious metals by comparing the inflows and outflows of capital.
Pros
With an ETF, an investor can make purchases based on margin to control a larger slice of the pie.
Cons
On the downside, ETF holdings must mirror the going market rate for the metal. When the price declines, an ETF must sell physical metals that leads to a domino effect as lower demand is met with higher supply.
Mutual Funds
Mutual funds can help an investor gain from the full spectrum of companies involved in the precious metals industry.
Pros
This diversified approach allows an investor to create a flexible portfolio with lower risk.
Cons
Commissions and fees can lower the return on gold mutual funds. Furthermore, you usually do not own any physical metals.
Gold Coins
Most gold coins were in circulation years ago, but have since been hoarded because of their intrinsic value. You must differentiate between numismatic, semi-numismatic and bullion coins. Numismatics are legal tender, most semi-numismatics are collector’s items and bullion have a high gold content.
Pros
Numismatic/Artistic value, scarcity and historical significance increase the value of gold coins. Gold coins are easy to identify and authenticate. This gives them a premium over other gold investments. Holding gold coins gives you physical possession of the asset.
Cons
Not every one is a coin collector and it can be difficult to get fair value when you want to sell.
Gold Bars
Gold bars are the currency of central banks. These have their own serial numbers, which can be tracked by the financial institutions.
Pros
Gold bullion bars are easy to identify, stack and authenticate. They represent the penultimate peak of financial success with physical possession.
Cons
You will need to spend significant amounts of money on security and storage. Those who work in the gold storage facilities must wear special iron-plated shields on the tops of their shoes because a dropped gold bar could break bones. There have been some tungsten-filled gold bars found.
Precious Metals IRA
It is also possible for Americans who own an IRA to invest in gold through it. Depending on your type of IRA, you may or may not be able to buy gold. If your current custodian does not allow precious metals, consider opening a separate Gold IRA. The IRS allows you to open a separate IRA for precious metals. There are some important requirements to fulfill though, such as precious metal purity (needs to be 99.9%+) and the custodian needs to be fully accredited and allowed to securely hold your metals.
There are probably many other ways to own gold, but the above are certainly the most popular ones in the U.S. Do you know of any other way to invest in gold that we should have covered? Let us know by commenting below.
Jonathan Kund is a financial content writer with expertise in precious metals, commodities, alternative investments, US economics and more. His articles have been featured on Forbes, Entrepreneur.com, Benzinga and many other publications. He has a degree from the College of Southern Nevada in Financial Mathematics.
