The Pros and Cons of Investing in Gold

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Many investors are interested in investing in gold, but information on gold investing is hard to come by. Most brokers don’t know much about gold. They steer their clients away from what could be a very lucrative investment choice because of this lack of knowledge.

Part of the reason brokers don’t advise people to invest in gold is because brokers are not allowed to sell gold. As a result, they have no incentive to direct their clients’ cash to gold. They also have no incentive to understand more about the pros and cons of investing in gold. There is nothing in it for them. But there is a lot in gold investing for you.

We think that investors deserve to have all the facts they need about every type of investment, including gold. So here’s a look at a few of the pros and cons of investing in gold.

Pros

Goal is a safe investment

The price of gold has nearly always risen over time. Although there are small dips in the price, for the most part gold prices continue to rise. This means that gold is a safe place to store your cash.

You do not have to worry about market crashes or the success or failure of a company’s business plan as you do with stocks. Gold retains its value and increases in price with the passage of time.

Gold is a hedge against inflation

One of the best parts about investing in gold is that the value of gold always beats the rate of inflation.

The price of gold on December 29, 2014 was $1181.54 per ounce.

On January 1, 2005, it sold at $437.80 per ounce.

That is an increase of almost 270 percent during the 10-year period.

The cumulative inflation rate over the same time is 24.3 percent.

The increase in gold price exceeded the inflation rate by more than 10 times.

Gold is a great way of beating inflation and preserving capital.

It’s Easy to Invest in Gold

Despite the fact that most brokers steer their clients away from gold, the truth is that gold is quite easy to invest in.

You can buy gold coins or gold bullion from many dealers.

Owning gold this way has many advantages as well. When you hold the gold, you have the ability to see, display and touch your gold.

Gold is beautiful. It’s a pleasure to look at in the form of gold coins, art or other collectibles.

Physical ownership of gold also means that you have ready access to your gold whenever you choose to turn it back into cash or if you ever need fast access to your funds.

You can also invest in companies that mine gold. If you tell a broker that you are interested in gold, this is almost always the option they will suggest.

While gold mining companies are or can be good investments, you are one step removed from the actual goal itself.

Since these mining companies have little control over the price at which they can sell their gold, the only way they can be more profitable than other mining companies is to keep a tighter rein on costs.

A company can only go so far by cutting costs. This means that your profit upside may be limited if you invest your funds in mining companies whether through your broker or directly.

You can also invest in gold through many ETFs or ETNs. These funds own gold, although they really take physical possession of the gold.

Typically they will own gold that they have bought on margin, through derivatives or with shorts or longs.

With ETNs, you usually do not own an actual piece of gold. Instead, you own a certificate, which gives you a share of gold.

The advantage of ETFs or ETNs is that their shares are easily bought and sold over-the-counter. This makes your investment in gold very liquid.

In addition, because of the complex buying and selling methods that ETNs use, you may actually earn very high returns. This may be especially true during gold market fluctuations.

With an ETN or an ETF, you don’t need to follow the gold market closely because your fund managers are doing that for you.

In short, putting your hard earned funds in gold is safe, secure, and lucrative. It provides peace of mind. It acts as a hedge against inflation.

Cons

Liquidity

If you own physical gold, you must buy from a dealer. When you buy from a dealer, you will pay a small markup over the price of gold on the open market.

If you want to sell your investment in gold, you will also need to go to a dealer who will buy it at a slight discount from the price on the open market.

As a result, your a profit may be somewhat less than the change in the absolute price of gold.

Most dealers take only a small percentage of the value as a commission. If you have held your gold over time, your rate of return should still be very good because gold returns often exceed the return from other investment choices.

Lack of broker support

Because brokers can’t sell gold, they typically know very little about gold ownership or ways of investing in gold. They will almost always steer you toward buying shares in a mining company if you express a desire to invest in gold. That is because that is the only way they help you gain a position in gold.

As we discussed above, investing in a mining company may not be the most lucrative investment. As a result of this broker practice, many Americans are discouraged from investing in gold even though it may be the right choice for them.

A broker may suggest that you buy an ETF or an ETN.

But here too brokers have little knowledge about ETFs that are focused on gold. They may not be able to advise you about what makes one ETF a better investment than another.

Politics

The political climate in a country sometimes it affects the value of gold. When there are conflicts in gold mining regions, the price of gold may reflect that unrest.

In addition, many central banks and governments hold large stores of gold. Sometimes fears that these governments are about to release the gold affects the price of gold. However, seasoned gold investors realize that this is unlikely to happen and continue to earn returns by staying the course.

Investing in gold is simple. It can be very profitable. Investors deserve to have the facts they need to make an informed choice about the disposition of their funds.

Gold should be a core part of every portfolio. It provides a safe harbor that protects capital from political unrest, inflation or disasters. It offers superior returns. It is even fun and exciting for the investor to own gold. The only remaining decision should be what percent of capital to earmark for gold.

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