We’ve all heard or seen “buy gold” commercials on radio and television. Usually paid celebrities to talk about how “bad” the market is and then introduce gold products. The question is, how much attention should we pay to these ads? Is gold a good investment? They say this is an investment that will not fail when the stock market crashes. However, gold is always compared to stocks and not fixed-income securities like bonds.
Whenever I hear someone think about gold, they always seem to go to extremes and are willing to invest all their money in the gold business. Opinions about yellow metal are always different. Some, like Warren Buffett, say there is no place for it in modern portfolios. On the other hand, some say it should be included. So, what exactly should we do?
Table of Contents
- Why should you invest in Gold?
- Gold Investment: Points to consider
- What is a Gold Fund and how does it work?
- Is gold a good investment at the moment?
- Invest in Gold: Is it still profitable?
- Gold vs Mutual Funds: Which one should you invest in?
- FAQs: Frequently Asked Questions
Why should you invest in Gold?
Safety, liquidity, and profitable returns are the three criteria most risk-averse investors look for before investing. Gold easily meets its first two criteria, but the last isn’t bad either. Reasons to invest in gold:
- Investing in gold is worthwhile because gold is an anti-inflationary investment. Over time, the rate of return on gold investment has matched the rate of inflation.
- Gold is inversely related to stock investment. For example, gold works well if the stock market starts to fall. Including gold as an investment option in an investment portfolio buffers the overall volatility of the portfolio.
Gold Investment: Points to consider
One thing to keep in mind is that gold has no intrinsic value means no dividends. I want to emphasize here that we are talking about gold bullions, not about collectibles such as gold coins or gems. The best way to decide to invest in something like gold is to look at history.
According to a study, gold has risen about 200% from 1986 to till present date, especially the price rise from 2006 to 2013 to 2014. The breakthrough during this time was amazing. However, if you look at the long-term history of the Dow Jones over the same period, you’ll see that it’s up about 900%. That’s a major difference.
I’m not saying you shouldn’t hold gold as an investment, but if you decide to do so, you shouldn’t hold it as a physical investment. In other words, don’t buy gold bars and store them at home. Security issues are a total mess when you do things like that. Instead, I believe that if you are interested in adding gold bullion to your portfolio, you should invest in an ETF or mutual fund that sells your gold position.
What is a Gold Fund and how does it work?
By investing in a gold fund, you are investing in the stock of companies engaged in gold and gold-related activities. The Gold Fund holds silver, platinum, and other metals in its investment basket. Unlike gold ETFs, mutual fund managers manage gold funds on behalf of asset managers. Use fundamental trading analysis to buy and sell stocks to maximize investor profits. Gold fund returns are somewhat dependent on market conditions. Gold Mutual Funds largely eliminate return risk by diversifying your investments across a wide range of investment opportunities. In other words, mutual funds work on the principle of diversification which means not putting all eggs in one basket. An investor should consider his/her risk tolerance and goals before committing to such a mutual fund.
Is gold a good investment at the moment?
The downside to this is that gold should have its place. An article in 2014 was published by Casey Research (which is still relevant in today’s market) taking the position that gold should be a major component of a portfolio. This is because gold is not the responsibility of governments or corporations. Buyers can invest directly in gold and have been doing so for decades. Research shows that gold has returned about 5% since 1934. This is a decent ROI, especially for fixed-income positions. This provides a buffer against downward volatility. According to their research, gold outperformed the S&P 500 by more than 5% from 2004 to 2014. The reason for this is obviously the significant rise in gold during this period. But here’s the problem. Like any investment that shows big ups, it will eventually show big downs as well. so please be careful. Looking at the 30-year portfolio from July 1971 to February 2014, the S&P 500 returned just over 10%, while gold returned 9.53%. Assuming you have about 30% of your portfolio invested in gold, you can get returns close to 10% even with much lower market volatility.
Invest in Gold: Is it still profitable?
Many gold advocates suggest that it is an excellent hedge against rising prices. However, the facts do not support this statement. Gold is often a better hedge against financial crises than against inflation. In times of crisis, gold prices tend to rise. However, this is not always the case during times of high inflation. If a financial crisis or recession is looming, it may be wise to buy gold. However, if the economy is in a period of high inflation, it may be wise to hold off.
When investing for retirement, you want an investment that you can expect a reasonable valuation to generate current income or sell for future consumption. Gold is not a reliable asset for these purposes. Also, be aware that if you have money in a retirement account such as an IRA, selling it for cash can result in early withdrawal penalties.
Gold vs Mutual Funds: Which one should you invest in?
As a result, mutual funds re-entered the charts as preferred investments. Mutual funds reduce risk by spreading your investments across a wide range of industries. Simply put, it works with the wisdom of not putting all eggs in one basket. However, investing in mutual funds, unlike investing in gold, requires a lot of planning and vigilance on the part of the investor.
Let’s move on to the discussion of investing in gold and mutual funds and define which is the better way to invest.
Gold is a precious metal that is naturally liquid. Whereas in mutual funds money can multiply by pooling investors’ money into stocks, bonds, and other market instruments.
Investments in Gold are made and managed by investors. On the other hand, investments in a mutual fund are professionally managed investments, wealth creation, and risk mitigation
Investments can be categorized into physical gold and gold ETFs, but they are more or less the same thing. No diversification. Mutual funds involve portfolio diversification by investing in different securities
Physically carrying and storing gold carries a high risk of theft or robbery. Investing in mutual funds can be done using secure methods.
Gold does not pay dividends. Mutual funds offer great returns to investors.
Gold is a highly liquid asset. You can trade with anyone, anywhere. Mutual funds are also highly liquid and can be withdrawn at their current net asset value. However, it can only be sold in certain market segments and can’t sell to anyone anywhere.
With an average cost of Rs 50,000 per 10 grams, you should think carefully before making an initial investment in gold. Start investing considering the high price. Investing in mutual funds is affordable and flexible. You can start investing from 1,000 rupees and even with 500 rupees either as a lump sum amount or systematically.
When investing in gold, you don’t need to be vigilant. Even the most inexperienced investor can reap significant returns over the long term. You should always be careful when investing in mutual funds. Only a savvy investor with money market expertise can find out how to profit from mutual funds.
Gold did not hold up to market volatility. But no matter how bad it looks, its value will always increase in the long run. Mutual funds are highly dynamic financial instruments that constantly take advantage of the ups and downs of the market and are not a stable investment path.
All investments have their positive sides and negative sides. Investing in physical gold requires protection and security to protect against theft. Investing in gold has many drawbacks. Another viable investment option to consider is mutual funds. They are also more tax efficient than traditional investments and have the potential to generate much higher returns when the market is favorable.
So, to answer the basic question, “Is gold a good investment?”, according to modern portfolio theory, if you buy stocks and bonds, it may be wise to invest a small portion of your portfolio in gold for the long term. If you follow the principles of using gold as a hedge against negative moments in the market, rebalancing your portfolio at key times, making quality investments, and not trying to time the market, gold will be in your portfolio.
You can take both positions and still come out on top. However, it is important to know your risk tolerance. Historically, a 100% stock portfolio will yield more. However, if your risk tolerance doesn’t allow it and you don’t want to invest your money in traditional bonds or other fixed-income positions, gold may be a good alternative.
As a rule of thumb, financial experts often suggest that you should invest a small portion of your wealth in gold. This is considered good advice as it acts as insurance. If you lose all other stocks in a crash, gold should follow its past trends and appreciate in value so as not to lose everything. However, this is not guaranteed, so be careful when purchasing this precious metal.
FAQs: Frequently Asked Questions
Should I invest in gold or mutual funds?
The decision to invest in gold or a mutual fund depends on many factors, including; Investment goals, risk tolerance, available investment amount, etc. A sensible approach is to proportionate your funds between gold and mutual funds.
What is the difference between 24K gold and 22K gold?
Gold is gold. 24k gold doesn’t have that type except for the quality parameter which means that 24k gold is always more expensive than 22k gold.
What is the best way to invest in Gold?
Investors can invest in gold through Exchange Traded Funds (ETFs), buy shares of gold mining companies and affiliates, and buy physical gold. There are as many reasons why these investors invest in metals as