Is investing in gold profitable?
- Many investors and financial analysts differ on this, as some believe that gold is merely a means of immunization against risks in stock markets and other volatile investments, as well as against high inflation and uncertainty.
- Basically, they believe that gold only protects the value of money from erosion, but it is not suitable as an investment tool because it does not achieve a return, like stocks, for example, that pay dividends from corporate profits, or bonds that pay a fixed interest.
- Such people include the legendary investor Warren Buffett, one of the 5 richest people in the world, who refuses to invest in gold because it does not generate a return, and prefers to pump his money into company stocks and wait for them to achieve strong returns in the long term.
- In a letter to his participating investors in 2018, Buffett compared the feasibility of investing in gold and stocks, saying that investing $10,000 since 1942 in American stocks would have achieved $51 million today, compared to only $400,000 for the precious metal.
- On the other hand, fans of the precious metal see an opportunity to make a capital profit through long-term investment in it, meaning buying gold and leaving it for a long period until its prices rise and then selling it, to make a profit from the difference in the buying and selling prices.
- Gold preserves wealth when investors face a falling US dollar and rising inflation, and historically, gold has served as a hedge against both of these scenarios (a moment that gold bulls wait for to make gains).
- As inflation rises, the value of gold typically rises, and when investors realize that their money is losing value, they will begin to place their investments in an asset that has traditionally maintained its value. The 1970s were a prime example of gold prices rising in the midst of rising inflation.
Factors affecting the price of gold
- Like other commodities, gold is affected by supply and demand factors. The greater the demand for it, the higher its price. If there are supply problems, such as a malfunction in a major mine or a major company announcing a reduction in its production, this leads to a rise in prices as well, and vice versa.
- But gold, as a global commodity that is in demand by everyone, from small consumers to central banks and investment institutions, is affected by many other factors, the most important of which is the price of the dollar, which is priced on some of the most important global stock exchanges. The stronger the dollar, the weaker the price of gold, and vice versa.
- Due to this connection to the dollar, the price of gold is directly affected by the interest rate in the United States. If the Federal Reserve (the US central bank) decides to raise interest rates, this negatively affects the value of gold, because it means additional strength to the value of the dollar, and encourages investors to pump their money. In treasury bonds, the yields on which will rise.
- As an investment tool, gold prices are affected by the performance of stock markets, which constitute a somewhat risky investment (possible for gain and loss). At times when stock markets recover and their gains increase under favorable conditions and a clear healthy investment climate, gold prices usually decline.
- Inflation in general, in the United States in particular, is reflected in gold prices. Whenever inflation increases, it means a decline in the purchasing power of currencies, and thus investors buy gold to preserve the value of their savings, and here the price increases. But inflation may sometimes be a signal to raise interest rates at a later time, which may then negatively affect the price.
- Also, geopolitical turmoil and the inability to predict what will happen in the future, due to a natural crisis (the pandemic, for example), are all an atmosphere that increases fears among investors, and in this case they turn to gold and other safe investments, to preserve either completely or partially the value of their investments. Of course, when investing in gold, we must take advantage of purchasing opportunities so that we can achieve a high return before any economic or political changes occur that lead to an increase in demand and thus an increase in the price.
Ways to invest in gold
- Investors can invest in gold through exchange-traded funds, buy shares of gold mining companies and related companies, or even buy the physical metal directly in the form of gold bullion or pounds, buy futures contracts for it and sell it later or hold it until the metal is actually delivered.
The most important tips for investing in gold
- Many leading investment advisors recommend allocating a portfolio to commodities, including gold, in order to reduce overall portfolio risk.
- Buying bullion is the most direct and popular way to invest in gold, but large bullion can be difficult to sell, especially if the owner wants to sell part of his holding.
- Smaller bars and gold coins offer greater disposability and are very popular among gold owners.
- The main problems with physical gold are that storage and insurance costs hinder the potential for profit. In many countries there are special vaults to keep gold in, and this costs customers additional money.
- Investing in gold exchange-traded funds is a cheaper and easier way to invest in the precious metal, as it is similar to buying and selling stocks.
- Futures contracts are contracts to buy or sell a specific, pre-determined quantity on a specific date in the future, but the cost of these contracts is large, and they require strong analytical ability regarding future trends, and therefore they are suitable for highly experienced investors.
- Companies specializing in mining and refining benefit from the rise in gold prices, and investing in their shares can be an effective way to profit from gold, and carries less risk than other investment methods.
- If gold prices rise, the value of the shares of companies linked to it may increase, in which case the value of one's original investment increases, and in the end he will receive a portion of the profits of the invested company.
