When economic times get tough, some investors look to gold as a hedge against the risk that their other investments will depreciate. The intrinsic value of gold, these investors say, means it will keep its value even if society breaks down and paper money becomes worthless. That’s a doomsday scenario. If you decide to invest in gold, we say it should be based on facts, not fear. So here are the facts on investing in gold.
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Gold As an Investment: The Basics
Gold prices tend to rise in response to events that undermine investor confidence. These could be economic events like the 2008 financial crisis, geopolitical events like wars or events like natural disasters. To many people, gold represents a safe haven for investment dollars. They see it as offering a buffer that will keep the value of an investment portfolio from shock, and from losing ground to inflation. However, this doesn’t necessarily mean people invest entirely in gold. Instead, people who “go for the gold” generally allocate only a minor portion of their investments to the precious metal.
How to Invest in Gold
So you want in on the action? In that case, you should know about the different ways to invest in gold. Buying shares in a gold mining company (junior gold stocks) is one way to tie the fate of your investments to the value of gold. But it also adds extra risk. If the company is poorly managed, runs into problems or folds, your shares could become worthless for reasons that have nothing to do with the price of gold.
You can also buy gold exchange traded funds (ETFs) and gold mutual funds. Gold ETFs hold actual gold as assets and trade on the market. In contrast, gold mutual funds hold shares in companies that mine for, process and distribute gold. If you want to get fancy (and higher-risk), you can invest in gold futures or gold options and try to make money off movement in the price of gold. Of course, another route is to buy the physical gold and then figure out a way to store and insure it. Most of us don’t have houses equipped for the secure storage of gold bullion, though.
Investing in Gold: The Risks
Although gold is billed as a hedge against risk, it’s actually a risky investment in its own right. For one thing, speculation on gold stocks and futures can lead to wide price swings. If you can handle a high level of volatility in the value of your investments, that’s one thing, but if you’re drawn to gold because you’re a conservative investor, you may want to reconsider.
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Gold has a mystique, but is that justified? When was the last time you took some gold down to the corner store and used it to to buy something? Sure, there’s gold jewelry, but it’s not exactly a currency. The perception of gold as a desirable investment is powerful but remember that our currency isn’t backed by gold anymore.
Most people who want to invest their retirement savings can get away with buying and holding low-cost index funds. Dabbling in individual stocks and commodities like gold is probably overkill for most average investors. If you still want to put some of your money into gold, it’s a good idea to proceed with caution and be prepared for volatility.
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