Why invest in gold?
Gold is a unique asset: highly liquid, yet scarce; it’s a luxury good as much as an investment. Gold is no one’s liability and carries no counterparty risk. As such, it can play a fundamental role in an investment portfolio.
Gold acts as a diversifier and a vehicle to mitigate losses in times of market stress. It can serve as a hedge against inflation and currency risk.
But how much gold should investors add to achieve the maximum benefit? Portfolio allocation analysis (based on the seminal work of Richard and Robert Michaud) indicates that investors who hold between 2% to 10% of their portfolio in gold can significantly improve performance. This is also true even when assuming a conservative average annual gold return of a modest 2% to 4% – well below its actual, long-term historical performance.
How to buy gold
There are many ways to buy gold. Different products can be used to achieve a variety of investment objectives.
Investors should consider the options available in their market, the form of investment that is appropriate to their circumstances, and the nature of professional advice they will require.
Deciding how to invest in gold involves reviewing the various gold-related investment products The various gold-related investment products, all of which have different risk and return profiles, liquidity characteristics and fees. Typically, an asset allocation strategy will consider long-term versus medium-term returns, and how gold investment products perform in positive or negative correlation with other assets.
Buying physical gold (bars and coins)
style="text-align: left;">Small bars and coins accounted for approximately two-thirds of annual investment gold demand and around one quarter of global gold demand over the past decade. Demand for bars and coins has quadrupled since the early 2000s, and the trend covers both the East and the West. New markets, like China, have been established and old markets, like Europe, have reemerged.Buying gold-backed ETFs and similar
style="text-align: left;">Physically-backed gold exchange traded funds (ETFs), exchange traded commodities (ETCs) and similar funds account for approximately one-third of investment gold demand. These funds were first launched in 2003 and, as of March 2016, they collectively hold 2,300 tonnes of physical gold on behalf of investors around the world.Buying into allocated gold accounts
Bullion banks offer their institutional or high net-worth customers allocated gold accounts consisting of gold deposits and resembling currency accounts. The holder of an allocated account is the legal owner of a specific quantity of gold. Bullion banks also offer unallocated accounts. In an unallocated account, a customer does not own specific bars or coins, but has a general entitlement to a set amount of gold. The investor is not the legal owner of any physical gold, but rather is a creditor of the provider.
style="text-align: left;">Internet Investment GoldAn increasingly common way of accessing the gold market is Internet Investment Gold (IIG). Internet Investment Gold allows investors to buy physical gold online, have it stored in professional vaults and take possession of it should the need arise. As such, Internet Investment Gold offers investors a highly convenient way to benefit from outright ownership of physical gold.
Buying gold derivatives: futures, forwards and options
Investing in derivatives requires more knowledge of financial securities than other forms of investing and may not be suitable for all investors.
Derivatives trade over-the-counter (OTC) and on exchanges. Derivatives traded on exchanges settle in a central clearing house that matches buyers and sellers. OTC derivatives are bilateral contracts that have more flexible structures but include additional counterparty risk.
Buying gold mining stocks
Investors can invest in shares of gold mining companies. Gold mining company stocks may correlate with the gold price. However, the growth and return in the stock depend on the expected future earnings of the company, not just on the value of gold.
Gold Preserves Wealth
The reasons for gold's importance in the modern economy centers on the fact that it has successfully preserved wealth throughout thousands of generations. The same, however, cannot be said about paper-denominated currencies. To put things into perspective, consider the following example:
In the early 1970s, one ounce of gold equaled $35.7 Let's say that at that time, you had a choice of either holding an ounce of gold or simply keeping the $35. They would both buy you the same things, like a brand new business suit or a fancy bicycle. However, if you had an ounce of gold today and converted it for today's prices, it would still be enough to buy a brand new suit, but the same cannot be said for the $35. In short, you would have lost a substantial amount of your wealth if you decided to hold the $35 as opposed to the one ounce of gold because the value of gold has increased, while the value of a dollar has been eroded by inflation.