Sunday, February 22, 2009

Should I buy gold?

One of the most important questions that investors are asking themselves at the moment is whether to buy gold. There are a lot of investors out there who fearing inflation or the loss of value of paper money are asking themselves this question: Should I sell my stocks and buy gold? There is no definite answer, however each investor should think about the risk and benefits of holding the metal and act accordingly.

Benefits of holding gold

1. Gold preserve wealth
Gold is very important to preserve wealth especially in troubled times. Gold and silver had existed for thousands of years and has not loss value. It keep up with inflation. It can simply be said that one ounce of gold was as valuable in the 30s as it is today. However a dollar was worth much more than it is today. Unless appropriately invested so that it can earn above inflation return a dollar will lose value over time.

2. A hedge against inflation
Preserving wealth is very important in times of high inflation. Very few investment instruments can keep up with high inflation. Many economists are forecasting high inflation in the years to come due to the huge amount of money being injected in the economy. They are also forecasting a declining dollar as nations shift away from the dollar as a reserve currency. Gold is the ideal instrument to preserve your wealth if you believe them. With rising inflation, gold typically appreciates. You would probably remember the 70s when high inflation decimated the investment of many people, whereas those who invested in gold preserved their wealth until inflation was back under control in the 80s.

3. Can be used in troubled times
Some people called survivalists are forecasting a major breakdown of the economies of different countries. If such a thing happen, then only hard assets like gold, silver and land will have value. So these survivalists are buying gold to this effect. One example is Zimbabwe where the dollar is worthless. In such an economy only gold and silver will have value. So if you think that your economy will collapse then it would be a good idea to invest in solid gold.

4. A part of a diversified portfolio
The last reason to hold gold is as part of a diversified portfolio. You will allocate a certain percentage of your portfolio to gold because of its ability to hold its value. This will reduce the volatility of your portfolio. You will thus diversify your investment which is always a good thing. If you hold gold in order to diversify your portfolio, the percentage should not be too high.

Types of gold investments
The following are possible investments in gold.

1. Gold Futures
A future is a contract on commodities that gives you the ownership of future gold that has not yet been mined. It is like owning next years wheat harvest.

2. Gold Coins

Coins in gold that are minted and sold mainly for collection. They are however more valued that the value of the gold in them.

3. Gold Companies

Shares in gold mining companies or companies that service or support gold miners.

4. Gold ETFs
A security that will track the price of gold, gold index funds and so on. Its value will mirror the price of gold.

5. Gold Mutual Funds

A fund that will buy stocks in various gold related companies. You will invest money in the fund. It will be like owning gold stocks.

6. Gold bullions

Gold in bulk in the form of ingots or coins. They can be bought in real or stored by third parties. It is unclear what would happen to your gold if the storing companies go bankrupt.

7. Gold jewelry

Jewelery are more expensive and the weight of gold in it is less that the price of the jewelery.

As you can see gold is a very versatile investment instrument. Whether you want to hold real gold or benefits from the rising price of gold is up to you. However the rising in the price of gold in the near and medium term is certain. Hence it is a must for every investors to either hold real gold or at least invest in gold shares.

A last piece of advice. I see with great suspicion the proliferation of companies that buy gold and store it for you. I would prefer to hold my physical gold in my own hand. A paper saying that i own gold is not the same as owning real gold.

Good luck in your future gold investments.

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1 comment:

  1. They say that you have to spend money wisely. Because of this, I'm convinced that I have to BuyGoldAssets. This is my security blanket and I know I'll be able to use this in the future.