Thursday, October 15, 2015
Does Investing in Gold Make Sense?
October 14, 2015: For many of us, purchasing gold coins during Diwali is considered auspicious. So it begs the question: does it really make sense to invest in gold?
Historical Gold Trends
Generally speaking, gold has been regarded a safe haven for many people. In recent years, gold prices have been volatile. In 2013, the gold price dropped more than 25%!
Looking at the chart above, you can see that if you invested $1 in gold in 1802, its value would be $3.21 in 2013, a mere 0.6% increase. Stocks, by comparison, would turn your $1 investment from 1802 to $930,550 in 2013.
Does this mean investing in gold is a bad idea? Not necessarily. Given the right economic conditions, gold can be a great investment! The key is to have the right mix of investments, gold being one of them.
How is Gold Priced?
Gold prices are fixed twice daily in US Dollars by the London Bullion Market Association (LBMA).
There are ten price participants who have been accredited to contribute to the LBMA Gold Price. This serves as an indicator and basis for the market price, also known as the spot price.
When you search “gold price today” in your favorite search engine, what you see is the spot price for gold. The retail gold price is generally greater than the spot price for the following reasons:
Cost to Create Gold Coins
When you purchase physical gold coins, gold bars known as bullion are melted and molded into coins. This leads to an additional cost that is passed to the purchaser.
Brand of Gold
The four well-known brands of physical gold are the American Gold Eagle (most expensive), Canadian Maple Gold Leaf, South African Krugerrand and Credit Suisse Gold Bar (least expensive). What you pay for is the brand and there is no difference in the “quality” of gold. Unbranded gold rounds are also available from private mints and cost less than branded gold coins and bars.
Karat (symbolized as K) is a measurement for gold purity with 24K being the purest and most expensive form of 100% gold with no mixed metals. 22K gold has 91.6% pure gold that is mixed with 8.4% of other metals. Similarly, there is 18K (75% purity), 14K (58.5% purity), 10K (41.7% purity) and 6K (25% purity) gold.
Ways to Invest in Gold
There are many different ways to invest in gold each with it’s pros and cons.
Gold coins, Bars and Rounds
Branded and unbranded physical gold can serve as a safety net against inflation or should physical currency ever disappear.
Gold jewelry serves as a fashion accessory and also an investment. However, there are additional costs associated with making gold jewelry, which makes the net price per gram of gold significantly greater than the spot price.
Exchange Traded Funds (ETF)
A Gold Exchange Traded Fund is a marketable security that can be traded like a common stock thereby removing the need to store and secure physical gold. Generally, there are additional fees and commissions associated with ETFs, which may offset any potential upsides in gold prices. You can also purchase stocks of gold mining companies. However the rise in gold prices may not necessarily correlate with the increase in stock price of a gold mining company due to factors such as mismanagement, flooding etc.
What Experts Say
When it comes to investing, you may have heard about asset allocation and diversification. What this means is that you diversify your investments across various asset classes such as gold, commodities, stocks and bonds and allocate specific percentages of your money to each of these asset classes. In his book, Money–Master the Game, Tony Robbins, a motivational coach and personal finance instructor, discusses Ray Dalio’s all-season portfolio. Dalio is the founder of the investment firm Bridgewater Associates. Dalio’s portfolio consisted of 30% stocks, 40% long term US bonds, 15% intermediate bonds, 7.5% commodities and 7.5% gold.
The key here is to remember to regularly re-balance your portfolio. It is also important to note that gold prices are very volatile and it is hard to predict the right time to buy and sell gold. Whether gold is the right investment choice for your portfolio depends on your tolerance for risk and investment goals. Happy Investing and Happy Diwali!
Kunal Sampat is part of Sampat Jewellers Inc, a family owned business based in San Jose and Mumbai. This article was inspired by Kunal’s own personal curiosity of what it means to invest in gold.
Courtesy: India Currrents