Whenever we talk about gold investment, we will have very strong reactions from the pro-camp and the anti-camp. Both camps will cite very valid reasons for their stance on whether is gold a good investment
Actually, the question is gold a good investment really depends on your personal preferences in investing.
If you are someone like me who doesn’t like to follow the latest business news or researching and dissecting economic and monetary policy, then gold investment is definitely the best choice.
Is Gold a Good Investment ? Characteristics Ideal for Passive Investment
You see, gold has 3 distinct characteristics that makes it great for passive investors, namely
Increasing Purchasing Power Parity Over Time
It does not diminish in its purchasing power over time due to its limited supply. Based on this fact, the actual cost of producing more gold is increasing as we start getting it from more inaccessible places. In fact, the purchasing power of gold can only increase over time.
Universally Accepted Store of Value
This is the main reason why all central banks will maintain a portion of their reserves in gold. This is the only store of value that is universally accepted. Unlike fiat currencies, it’s value is universal and is not affected by Governmental mismanagement of the country.
You always see huge inflows into gold whenever crisis hits. It doesn’t matter what kind of crisis it is. You see it shooting through the roof when there are geo-political tensions. You also see it charging when there are economic or health crisis.
The reason for this is that all fiat currencies have no value at all. It is a simply a piece of IOU, promised to be paid out when presented. Therefore, its value is based on the confidence that the issuer will pay as promised.
People, however, would want to hold something of substantive value instead, as their confidence in fiat currencies drop amidst the crisis.
Therefore, you will always see it shoot through the roof every time a crisis hits. It can run up a few hundred percent within a very short time.
You will then see it goes back to its steady rise path once the crisis is resolved.
Return on Gold Investment
The compounded rate of return for gold is 7% annually, based on past historical data. You can compare this with your cash deposits in the bank which pays a miserly 1-2%. You can’t even keep up with inflation with that kind of rate of return.
Of course, you can get higher returns investing in the stock market, which requires more work on your part. As for myself, I like the passive nature of it as I just continue to buy and forget about it, without having sleepless nights of what will happen to my wealth when a crisis hit.
How To Start Investing in Gold
You can use a principle called dollar cost averaging. This means that, you purchase a fixed amount of gold at fixed time intervals. For example, 50g (either in bars or coins) every month or quarter. You can then build up your position over time. This will even out the fluctuations of the prices that you paid for your gold over a long period of time.
To get better returns, you can fine-tune this by making more purchases during quieter times when the price is lower.
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A Word of Caution
One word of caution, though, is that holding physical bullion has a downside which is storage. Storing it at home, of course, opens one to loss due to burglary, theft and fire. Keeping it under lock and key in bank safe deposit also incur a charge. Therefore, keep this in mind when you make any investments in physical bullion.