Gold. It’s gleaming and metallic, and it melts into bars, coins, and jewelry with ease. It doesn’t corrode, rust, or deteriorate. The color gold is, well, golden. But why is gold so important as a global store of wealth and medium of trade, both in our minds and in reality? Why is silver so far behind gold, and what about poor old copper, which has many of the same physical properties as gold?
Gold as a Speculative Investment
Before getting on the gold bandwagon, let us first put a damper on the excitement and look at some of the reasons why gold investing has some fundamental flaws.
The main issue with gold is that, unlike other commodities like oil or wheat, it never runs out or is used. Gold is mined and then left in the globe. A barrel of oil, on the other hand, is converted into gas and other products that are used in the gas tank of your car or the jet engines of an airplane. Grains are found in the food that both humans and animals consume. Gold, on the other hand, is used to make jewelry, is utilized in art, is stored in ingots in vaults, and is used for a variety of other purposes. Regardless of where gold ends up, its chemical nature ensures that it will never be depleted – it is eternal.
As a result, the supply/demand rationale that holds for commodities like oil and cereals, among others, does not hold for gold. In other words, even if demand for the metal declines, supply will increase over time.
History Solves the Supply Issue
Gold, more than any other commodity, has captivated human communities since the dawn of recorded history. Over gold and mercantilism, empires and kingdoms were established and destroyed. Gold became universally acknowledged as a good source of payment as societies progressed. In short, gold has had a power greater than any other commodity on the earth throughout history, and that force has never truly vanished. Until the 1970s, the United States’ monetary system was based on a gold standard. Because the amount of credit issued is connected to a physical supply of gold, proponents of this standard say that such a monetary system effectively restricts credit expansion and enforces lending rules. After over three decades of credit expansion in the United States, which culminated in the financial catastrophe in the fall of 2008, it’s difficult to disagree with that viewpoint.
Gold is widely regarded as a good inflation hedge from a fundamental standpoint. In a sinking currency, gold serves as a good store of value.
The most straightforward way to invest in gold is through the stock market, where you may buy gold bullion or stock in gold mining businesses. Investing in gold bullion does not provide the same level of leverage as investing in gold-mining stocks. Miners’ better profit margins can enhance earnings dramatically as gold prices rise. Consider a mining corporation with a profit margin of $200 and a gold price of $1000. If the price of gold rises 10% to $1100 per ounce, the gold miners’ operating margin rises to $300, a 50% gain.
Of course, there are additional factors to consider when investing in gold-mining stocks, such as political risk (because many are based in developing nations) and the challenge of maintaining gold output levels.
The SPDR Gold Shares (NYSE: GLD) ETF, which just holds gold, is the most common way to invest in actual gold. Pay attention to net asset value (NAV) while investing in ETFs, as the purchase price can often surpass NAV by a large margin, especially when the markets are upbeat.
Barrick Gold (NYSE:ABX), Newmont Mining (NYSE: NEM), Goldcorp (NYSE: GG), and AngloGold Ashanti are among the gold mining firms (NYSE: AU). Passive investors interested in gold miners could look at the VanEck Vectors Gold Miners ETF (NYSE: GDX), which invests in all of the major miners.
The Role of Gold in Today’s Economy
Even though gold is no longer used to underpin the US dollar (or any other global currency), it still has value in today’s culture. It remains vital to the global economy. There is no need to look any further than the balance sheets of central banks and other financial institutions, such as the International Monetary Fund, to prove this argument. Currently, these groups are in charge of nearly one-fifth of the world’s above-ground gold supply. In addition, some central banks have increased their gold stockpiles, indicating concerns about the global economy in the long run.
Gold Helps to Preserve Wealth
The fact that gold has effectively stored wealth for thousands of generations is one of the reasons for its relevance in the current economy. The same cannot be said for currencies denominated on paper. Consider the following scenario to put things in perspective:
One ounce of gold was worth $35 in the early 1970s. Assume you had the option of holding an ounce of gold or merely keeping the $35 at the moment. They would both purchase the same items for you, such as a brand new business suit or a high-end bicycle. However, if you had an ounce of gold today and translated it to today’s prices, it would still be enough to buy a new suit, however, the $35 would not. In other words, if you chose to store the $35 rather than the one ounce of gold, you would have lost a significant amount of money because the value of gold has climbed while the worth of a dollar has been reduced by inflation.
Gold as a Dollar Hedging Instrument
In an economic context where investors are confronted with a weakening US dollar and growing inflation, the belief that gold maintains wealth is even more significant. Gold has traditionally served as a hedge against both of these eventualities. Gold is usually appreciated by jewelers when inflation rises. When investors see their money is losing value, they will begin to place their bets in a hard asset that has historically held its worth. The 1970s are a great example of gold prices growing in tandem with inflation.
Because gold is priced in US dollars around the world, it benefits from a weakening currency. This association exists for two reasons. To begin, investors interested in purchasing gold (such as central banks) must first sell their US dollars. As a result, the US dollar falls as global investors attempt to diversify away from the greenback. The second reason is that a weaker dollar makes gold more affordable for investors holding other currencies. As a result, investors who hold currencies that have increased in value against the US dollar are in higher demand.
Gold as a Haven of Safety
Whether it’s tensioned in the Middle East, Africa, or elsewhere, political and economic unpredictability is becoming an increasingly visible feature of our current economic environment. As a result, during times of political and economic instability, investors often seek gold as a haven. What is the reason for this? Well, history is littered with examples of empires collapsing, political coups, and currency collapses. During these times, gold investors were able to successfully secure their assets and, in some circumstances, even use the commodity to flee the chaos. As a result, if there are news events that suggest a global economic concern, investors often turn to gold as a haven.
Benefits of Gold Investment
1. It can protect you from the risks of inflation.
When it comes to investing, there is one thing you should be aware of because it has the potential to ruin your investment in the long run. It’s called inflation, and it’s the rate at which money loses value over time. Given this, you should never invest in cash, as it will depreciate, particularly in a developing economy like India. Instead, consider investing in gold or other stable assets that will safeguard you from inflation. It has been observed that gold has outpaced inflation over time, and having some gold savings will allow you to lower your risk by a significant amount. Millions of people across the country have made gold their preferred investment, and you will never regret it in the long run. You might try to comprehend the market by following the rates for some time. You can utilize online portals that provide information about such commodities to learn about gold prices today on the market. This will allow you to keep track of market fluctuations and begin investing systematically.
2. A Smart Way to Put Money Aside for the Future
When you have a steady salary, saving money for the future is crucial. When you engage in real estate, though, you may not be able to invest tiny amounts of money. Investing in actual gold is a simple solution in this regard. This will help you save money for the future while also allowing you to earn significant returns in the long run. The best option is to purchase gold coins from banks, which come with a quality guarantee. Because it comes with a certificate of authenticity, you will have to pay a slightly higher price than the market rate for this item. When you buy gold from the market, this feature will not be available.
3. In the market, it’s simple to buy and sell.
Physical gold can be purchased readily from any jewelry store in your area. It is, nevertheless, wise to get them from reputable jewelers who can provide a guarantee certificate. It’s worth noting that banks sell them as well, and you can readily obtain gold coins from them. The most significant benefit of purchasing from reputable suppliers is that you will receive original quality without risk, as well as correct receipts for future reference. You can check the current gold price from reputable sites and purchase gold from them. When it comes to selling, you can go to your local jewelers because they will be the most convenient. Keep in mind that gold is constantly in demand, so you won’t have to worry about liquidating your gold holdings. When you sell them on the market to local jewelers who are usually appreciated or traders, you will receive immediate cash. If you don’t want to sell them, you can put them up as collateral and borrow money from a variety of lenders. When people have gold in the form of ornaments, they frequently pick this option and then buy it back when they have enough money in the future.
4. Doesn’t necessitate a lot of upkeep
The nicest thing about investing in gold is that it doesn’t require any upkeep on your part, and you may easily store it for hundreds of years. Consider this: if you’ve invested money in a property, you’ll need to keep it in good working order, which can be exhausting if you’re working full-time. On the other hand, you can acquire gold and leave it in your locker for many years without having to worry about it.
Do you want to invest in gold? You should be aware of these seven facts.
India (including NRIs) is enamored with gold jewelry. The World Gold Council (WGC) has been aggressively marketing social and religious occasions as gold purchase events, causing demand to skyrocket in recent years. According to research, Indian households own approximately 16,000 tonnes of gold, the majority of which is in the form of jewelry. This is worth a whopping 27.2 lakh crore at current market prices. That’s nearly double the Reserve Bank of India’s foreign exchange reserves. Consider the elements to be mindful of and the knowledge required to invest in gold.
1. Purchasing gold in various forms
Any investor should be informed of the many methods for purchasing gold. Jewelry, the most traditional and popular method of purchasing gold in India, is not a good investment. The reason for this is that there are significant losses due to wastage and making charges. For specific and complicated designs, this can range from a minimum of 10% to a maximum of 35%.
Bank coins, once again, are not a good investment because banks demand a 5-10% premium for their coins. Bank coins also have less liquidity because they are not bought back by banks. Bullion bars are fantastic investment options, but the minimum investment is far larger than the average investor can afford.
ETFs that invest in gold is a popular choice these days. These are similar to mutual funds that only invest in gold. They are proving to be a more convenient and secure way to purchase gold. The fees are minimal, and the gold can be retrieved via technological means. The drawback is that you never get to “see” your assets.
2. Earnings now
There is no present income from gold in any manner. The dividend option in gold ETFs is the lone exception. If kept in physical form, there is just a monetary outflow for locker maintenance.
3. Increase in capital value
Gold has historically been the ideal inflation hedge. This is based on information from 1800 AD. However, in terms of absolute returns, gold has performed poorly, with returns of only 0.8% over inflation. In terms of capital appreciation, real estate and stocks outperform gold. Since 1979, real estate and stocks have provided returns of around 11% above inflation (1979 as that was the year the Sensex was launched).
However, when contrasted to extremely volatile stocks, gold is a very good option in the short run. When it comes to gold investing, the objective is to use it when the markets are sinking and inflation is high.
Gold investments can account for up to 5% of an entire investment portfolio (bullion, WGC coins, Gold ETFs). In terms of personal money, jewelry is not an investment. It’s just a splurge for fun, a sign of riches.
Gold does not pose a significant concern, at least in India, where deflation is rare. Even when official numbers showed negative inflation (deflation) in the previous year, food costs continued to rise. This was also reflected in gold prices.
The real danger of owning gold is the opportunity cost of investing in other, potentially more profitable options.
5. Availability of funds
When compared to all other investments, gold has the highest liquidity. Gold can be turned into states cash at any time and on any day. Banks, as well as your friendly neighborhood pawn shop, would lend you money for jewelry (but keep in mind that many banks do not lend money for coins, including their own). They can also be purchased at pawn shops, though many people are hesitant to do so for fear of acquiring “stolen jewelry.”
Your gold valuables would be exchanged for other gold jewelry by gold jewelers. However, the issue here is that there will be making and waste charges involved once more. Gold jewels lose value (to the tune of 10-35%) under this situation.
In most Indian families, a social component of liquidity is that gold has sentimental value and is the last object to leave the house in the event of financial troubles. This defeats the whole point of gold’s liquidity.
6. The taxation system
According to the Income Tax Act, gold is subject to capital gains tax. As a result, it is preferable to request a bill from your jeweler. In India, about 90% of the gold jewelry traded is unlabeled. For individuals considering gold as an investment, this is a big issue. Only branded jewelers would offer you a bill automatically. In other places, request one.
When computing gold capital gains, we can take advantage of indexation benefits. As a result, the tax due will be little. There are no further tax advantages to gold.
Gold gets a lot of points in this category. However, when the per gram price rises, the smallest single investment becomes more expensive. The convenience of holding gold for the short time has risen with the introduction of gold ETFs. Rather than holding cash for the short term, gold ETFs can now be purchased.