Investing in Gold, the Benefits and Risks

and should you invest in gold?

Since I am all about exploring various investing venues (Cryptocurrency, Legos, P2P lending, etc.), I have received the question if I would advise investing in gold. Gold has been around since centuries and currently indeed often seen as a good store of value and a great diversification tool since it is uncorrelated to stocks for example.

I personally do not own any gold in any form at the moment (and have not done much research on the topic yet) but thanks to Baruch Silvermann from The Smart Investor, who brings us the post, we will see if gold is something we should consider or not.

gold bar

Guest Post by Baruch Silvermann

Gold tends to be one of those investments that everyone wants when the economy starts to get rough. And it’s actually done quite well for a number of people who are involved in investing and do it well. But for others … it can be a bit of a problem.

Investing in Gold

If you’re planning on investing in gold you should know that it takes three different common forms:

  • Gold ETF’s
  • Gold mining shares
  • Physical gold bars and coins

When it comes to investing in institutional groups or hedge funds you’re also going to have a few more options, like futures contracts, options and/or CFD’s. When you invest in these types of gold, however, you’re actually going to have a little more risk involved in the process.

Now, when you’re looking to buy gold you’re generally going to look at the ones we mentioned above [Jonathan: These are the ones for us, retail investors]. And they are going to give you a few benefits and drawbacks that you should consider before you get too involved.

The Benefits of Investing in Gold

Investors find a couple of great benefits when investing in gold, here are the main advantages:

  1. Protect Against Inflation

The first benefit that you’re going to see when investing with gold is a protection against inflation. That’s because a lot of people are worried that governments are going to change the value of money in order to decrease the amount of money that they owe. Most countries are starting to see changes in the value of their money and that means that people who have money are starting to see a decrease in its value.

With gold, however, the government isn’t able to change the value of it. They’re not able to do anything with it because they can’t create it. As a result, gold continues to go up with inflation and it tends to be worth more money. When the value of cash goes down, gold continues to hold true or it starts to increase.

Think about the 1970s when an ounce of gold was worth approximately $35. If you had that same ounce of gold right now it would actually be worth the same as it was then (but that’s no longer $35). In fact, the value of the gold would be higher than if you had just had $35 in the 1970s and chose to hold onto that. That’s because the value of cash has actually gone down.

  1. Diversification of Your Portfolio

You’ve probably heard all about how you should be diversifying your portfolio and that’s absolutely true. And gold is a great way to diversify because it tends to do great even when other things are doing poorly. You’ll be able to balance out some of your returns and maybe make up for some of the shortfalls that you’re having in other areas if you diversify with gold.

eggs in tray
Photo by Daniel Reche from Pexels

That’s because gold can help you even if there’s a depression or a stock market crash. It keeps you from losing absolutely everything that you have. Plus, if you get invested in ETF’s for gold instead of actual, physical gold bars, you’re going to have a better security as well.

  1. Protect Against Market Crash

What happens if the market crashes? Everyone thinks about it though some worry more than others. The truth is if you’re invested in the stock market and there’s a market crash you’re going to lose absolutely everything. But if you have investments in gold you’re not going to have that. You’ll have somewhat of a buffer to protect you and to protect your money.

The truth is that investing a large portion of your money in gold is going to keep it secure and it’s going to mean that you have very little impact from any type of financial crisis or market changes. Your gold is still going to be worth at least as much as it was and potentially even more because that’s what tends to happen to gold prices over time and especially in times of market turmoil.

The Drawbacks of Investing in Gold

As with anything, you’re going to have some drawbacks when it comes to investing in gold, so you want to keep an eye on each of these things and see just how they’re going to impact you. After all, even though many people invest in gold and see it as a great way to hold your investments, there are some times when it’s not necessarily going to be a benefit.

  1. No Passive Income

If you own gold that’s all you have. There’s no actual income coming in from that gold. You just hold onto it. What you want to invest in generally, is something that’s going to help you get more money and improve your wealth. If you invest in something that isn’t making a passive income for you then you’re just holding your own.

With gold, you’re going to see a bit of increase and decrease, but you’re not going to see a whole lot of change. The best thing is to invest in gold stocks rather than in just gold, but you’re still going to see a bit more of a slow start than with other types of stocks and bonds.

  1. Historical Low returns

You probably don’t think of gold as being a risk to invest in but it actually can be. Chances are if the stocks are going well you’re going to see gold falling. And that’s been true throughout history, so it’s something that you’re definitely going to want to consider as you start investing.

Overall

In all, you’re going to find that there are some great benefits to gold. There are also some very serious drawbacks. The best thing that you can do is take a look at them both and see what works out the best for you. Maybe you want to have physical gold bars. Maybe you want to have shares in a company that works with gold. Maybe you want something else entirely.

No matter what you choose to do, the best way to go is to evaluate the options and at least put a little of your investments into gold. You’re going to have a much safer investment and you’re going to be able to hedge yourself against some of the downturns that tend to take the market by storm. You may have a bit of risk involved, but you’re the only one who can decide if that kind of risk is going to be worth the potential benefits that you’re going to see in the long run.

About the Author

Baruch Silvermann
Baruch Silvermann

Baruch Silvermann is a personal finance expert, investor for more than 15 years, digital marketer and founder of The Smart Investor. But above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

My take on investing in gold

Investing newspaper
Photo by Markus Spiske on Unsplash

From what I have read before and above, I understand that gold can be a great addition to a well-rounded diversified portfolio of assets. Less than 10% of the portfolio value seems to be the recommended allocation. Will I start adding some gold to my investments in the near future? While I think it is not unreasonable to add some gold to diversify one’s assets, I do not think I will in the near future for the following reasons : 

  • Not an income-producing asset: I love income-producing assets like Real Estate, REITs and dividend stocks. This is my current focus at the moment and as Warren Buffet said about gold: “It doesn’t do anything but sit there and look at you.”
  • Poor long term returns: According to this article, “From 1972 through 2013, common stocks returned 14.68 percent in falling rate environments while gold futures returned 7.85 percent. In rising rate environments, stocks returned 8.47 percent while gold only returned 4.86 percent. When rates were flat, stocks provided a gain of 10.61 percent and gold returned 8.61 percent.
  • It is impossible to value it: There is no intrinsic value, unlike a property, a stock or a bond, where you can go through the numbers.

Not all that glitters is a golden investment opportunity for me.

I would like to thank Baruch once again for this nice introduction to investing in gold and I hope it was helpful to you! And tell me, what about you, amigos? Have you owned gold? or have you considered adding gold to your investment portfolio? Do you think it can be a great opportunity? Let me know in the comments below

If like Baruch you wish to collaborate for guest posting or sponsored posts please do not hesitate to reach out by e-mail jon@joneytalks.com and of course, for everyone, do follow us on social media as well for more great content, check our FacebookInstagramTwitter, and join our e-mail list. I would love to connect with you!

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