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Why invest in gold? If you've been considering diversifying your portfolio, you've probably heard advice telling you to invest in gold. Read on to learn why investing in gold is a good idea and the different ways to invest in it.
Many investors consider gold a hedge against inflation. Research suggests that gold may be a valuable commodity when the inflation rate outpaces the interest rate.
There has been a lot of concern recently about rising inflation rates worldwide. While the federal government has been raising interest rates as well, gold can help stabilize your portfolio and make it more secure in times of uncertainty.
Why invest in gold? It's simple. It has been a currency for thousands of years, long before paper money existed. It's a precious commodity that has never lost its value throughout the ages. If you're worried about inflation, consider adding some to your portfolio.
One of the problems of investing in crypto, for example, is its high volatility. The price of Bitcoin and other cryptocurrencies can easily drop by 50% or even more in a short amount of time, making them terrible choices if you are looking for stable investments.
For example, in 2021, Bitcoin dropped by 30%—in just one day. Imagine losing 30% of your portfolio in just a few hours! Other cryptocurrencies are even more volatile.
That brings us to one of the fundamental differences between Bitcoin and gold. Bitcoin and other cryptocurrencies have no intrinsic value. They are not tangible assets.
Bitcoin is a speculative asset, making it a terrible choice as an inflation hedge. Nothing is backing it up.
Gold is not a non-volatile asset—its price can quickly rise or fall by 5-10% or even more. Nevertheless, it has historically experienced low volatility compared to most other assets.
However, in 2010, gold was the second-least volatile asset among selected commodities, with only livestock outperforming it as a low-volatile asset. Forget about cryptocurrency—other common investments, such as stocks and other precious metals, like silver and copper, were more volatile.
It wasn't just a one-off occurrence, either. The volatility rate for gold in 2010 was 16.1%, which was similar to its performance throughout the two decades prior.
If you want a strong portfolio, you need diversification. Never put your eggs in one basket, as the saying goes.
The problem with only investing in stocks, for example, is that you will be in serious trouble if the stock market crashes. Having tangible assets can help minimize the damage and ensure your portfolio retains at least some of its value.
A good diversification strategy won't rely on gold alone, however. You might also consider investing in other metals, such as silver and copper. In addition, consider investing in bonds, stocks, and even crypto.
While crypto shouldn't make up more than a tiny percentage of your overall portfolio due to the inherent risk involved, it can also help with diversification.
Gold has often risen in the opposite direction of paper assets, such as stocks, during times of economic uncertainty. In fact, during the Great Recession, it rose by 12.8 percent in 2009. Then, between 2010 and 2011, the price of it jumped by over 50% in just one year.
One of the reasons for that was that the dollar's value decreased due to the federal government's efforts to inject liquidity into the economy. As a result, investors flocked to buy gold instead, pumping up its price.
There's no surprise there. As people start to worry about the future value of stocks and cash (the dollar or other currencies), they start investing in gold. As demand increases, so does the price.
What does that mean for you? If you invest before a recession, it will likely be easier to sell it during a recession. If you need the cash because you lost your job due to an economic downturn, you can rely on your gold, as it will likely be in high demand.
Gold is highly liquid. That means it's easy to sell it whenever you want. It's always in demand—selling it is never difficult. Just walk into a few gold or jewelry shops, and you can find someone willing to buy it from you.
One of the things you should consider when looking at assets to diversify your portfolio is liquidity. If an asset has low liquidity, meaning it is difficult to sell, it will be less useful to you. If a time of economic uncertainty comes, or if you have an emergency and need to sell assets for cash quickly, you want a liquid investment.
Stocks are generally liquid, as there is usually a high sales volume—you can typically find buyers to sell your stocks to. That applies to publicly-traded stocks, at least. Nevertheless, it can take several days to complete the sale, transfer your funds, and get cash.
With physical gold, you can get cash instantly. Even if you have it in an IRA and don't have the physical gold in your personal possession, the physical gold in your IRA still retains its liquidity.
Compare that to paper assets, such as stocks. If a company goes bankrupt, nobody will want to buy its stocks anymore. With such low volume, the stock will suddenly have low liquidity. Remember, liquidity depends on how many buyers and sellers there are to generate sales volume.
Since it has historically been in high demand, you can bet that it will always have high liquidity.
One of the problems of investing in other tangible assets, such as jewels and diamonds, is that it requires specialization. You need to know which diamonds are precious and which aren't.
If you want to sell a diamond, you need an expert who can verify that it is a real diamond and not fake. Since it requires specialization, it makes it more challenging to sell, thus reducing its liquidity.
Gold, on the other hand, doesn't require as much specialization. It's a lot easier to check if it is real or fake, despite fake gold existing.
Not only that, but it's easy to determine the price of it, whether it's a coin, a bullion, or jewelry. The jeweler will base their quote on factors such as the purity and its weight. You can always melt it, and it will retain its value.
However, it is much harder to define a diamond's price, as it depends on many factors. An expert will need to use a magnifying glass to look for blemishes that you can only see with magnification. The more blemishes there are, the lower the price will be.
The expert will also analyze the diamond's cut. They will look at factors such as its brightness (the white light it reflects) and scintillation (the sparkle it gives off).
As you can see, determining a diamond's value isn't easy. While the price of gold can vary a little bit depending on your region and the particular seller, it won't differ drastically.
Gold is tangible. It's something you can hold onto and keep in your home. There's nothing better than knowing there is something physical that you own that has value—it gives you a certain sense of security and stability.
Even if you have a gold IRA, there will still be physical gold in custody held for you, unlike a paper IRA account. Many people opt for a precious metals IRA due to the peace of mind it provides. Knowing there is something to back up your IRA other than papers and promises is an excellent feeling, especially if you are relying on your IRA for your retirement.
There are many ways to invest in gold. Of course, you can buy physical. Some people go to a store to buy gold jewelry, while others buy them online—there are companies that will deliver it to your door.
You can buy bars or jewelry. Another option is investing in coins made of real gold. However, the problem with this method is that you will be responsible for keeping it secure.
Keeping some at home can be a good idea, as you can sell it when you need cash quickly. However, keeping a large amount of gold in your house is generally a bad idea, as you can lose it, or someone can steal it. You can keep it in a safe deposit box at your bank instead.
Another option is investing in gold-backed assets instead of gold itself. A ETF is a popular way to invest in gold without owning any physical. Gold ETFs are mutual funds that invest in bullion. The advantage is that you won't have to worry about keeping physical gold secure.
Not only is storage not a concern, but ETFs are highly liquid and accessible to retail investors. Since the funds usually invest in actual gold, the price of the ETF will depend on the market price, but your actual investment will be in the mutual fund and not in physical gold.
Another option is gold stocks. Gold stocks are broader than ETFs. A stock might be a share in a mining company that mines for it, unlike an ETF, where the fund houses physical gold bars. Gold stocks can be riskier than gold ETFs, as you also depend on the mining company not going bankrupt.
Gold is a collectible, and most IRAs do not allow you to own collectibles. That means that you can't have it in most IRAs—but there are exceptions. Self-directed IRAs can have physical gold.
You can keep coins or bars in your IRA. These IRAs are well-regulated, so you can trust them to keep your gold safe. For example, the IRS requires all coins and bars to have pureness of at least 99.5%. Bars must be from an approved mint. The only coin that doesn't need a fineness of 95.5% is the American gold eagle coin.
Coins must be in their original packaging and come with a certificate of authenticity. Not only must you buy IRS-approved gold, but you must also have an IRS-approved custodian store it in an IRS-approved depository. While that might initially sound complicated, it helps secure your investments. Furthermore, gold IRA companies can help you with the entire process, so it's not as difficult as it seems. In fact, it's pretty straightforward.
There are other types of gold IRAs as well, but only self-directed IRAs allow you to hold physical. Roth and spousal gold IRAs are also available. An IRA that doesn't have physical might hold gold ETFs instead.
In both cases, your IRA will depend on the market price, but only self-directed IRAs give you the security of having physical that belongs to you alone. Gold IRAs have many advantages both over traditional IRAs and buying gold outside an IRA.
First, let's examine the benefits of gold IRAs compared to other IRAs. They are self- directed, meaning you have more control over your investments. It can also be a great hedge against inflation and protect your retirement savings in the case of a stock market crash or recession.
Compared to traditional gold investments, gold IRAs help you plan better for retirement. They also have some of the tax benefits that regular IRAs have.
So, why invest in gold? Opening a gold IRA is an excellent option if you want to diversify your portfolio, prepare for retirement, and be financially stable in the case of an economic recession.
It's always good to own physical gold as a hedge against inflation and economic uncertainty.