Historically, gold has played an important role in the economies of many nations. Although it is no longer a primary form of currency, gold is still a solid long-term investment and can be a valuable addition to our portfolio. But is it profitable to invest in gold? With Raisin, discover all the information you need to know.
In a few words
- Some of the reasons it may be interesting to invest in gold are its liquidity, the constancy of its value in the market, or the coverage it offers against inflation.
- On the other hand, among the disadvantages of investing in gold, we find that it can create a speculative bubble and also does not generate passive income.
Why Invest in Gold? Main Advantages
Although gold is no longer a primary form of currency in the developed world, it is still a popular investment for the reasons detailed below:
- Liquidity. Physical gold gives you an asset with total liquidity since it can be easily converted into cash anywhere in the world. The universality of gold has no competitor.
- It maintains its value. Gold maintains its value over time and is more stable than other financial assets. For this reason, it is usually considered a traditional ‘safe haven‘ to protect capital.
- Coverage against inflation. Gold increases in value when inflation consolidates. Since it sets its price in USD, any deterioration in the European currency will lead to a higher price of gold. As a result, gold will offer a more stable investment during inflationary periods.
- Diversification. Adding different securities to our portfolio is an essential way to diversify and reduce the overall risk of our investments. In addition, because gold often moves inversely to stocks and monetary securities, it provides a particularly effective way to diversify.
- Universally desired investment. Gold is still a universal commodity. Although countries sell their currency futures, Treasury bonds, and other securities worldwide, unlike gold, they are subject to the impact of so-called political uncertainty.
- Products use gold.
A steady demand for this valuable metal, used in jewelry and electronics, stabilizes its price. . In addition, in times of increased demand, these markets can force the price of gold to rise.
Disadvantages of investing in gold
However, all that glitters is not gold, and the disadvantages of investing in gold are the following:
- Gold does not generate passive income. Other investments, such as stocks and bonds, can derive a part of the value of passive income through interest and dividends. However, the only return we can get from gold is when its price increases and we decide to sell it.
- Gold can create a speculative bubble. When the economy is unstable, many people start investing in gold. Although our investment could lose value once investors change their minds and the price is corrected,
- It needs physical protection and safe storage. If we choose to buy real, physical gold, we must store and secure it. Otherwise, we could not replace it if it was damaged or stolen.
- The sale of gold must be reflected in the income tax return and taxed on its revaluation in the same way that a listed fund or an ETF would be for the profits of the assets. On the other hand, by investing in gold bars, we would be exempt from paying VAT since they comply with the fiscal and political regime of the European Union.
- The increases in the value of gold coincide with the devaluation of the local currency. Some economists argue that gold only increases in value when the euro devalues or inflation is strong.
When should I invest in gold?
Normally, a good time to invest in gold is when inflation is expected to take over and reduce the value of the national currency. The sooner we detect such falls, the more space we will have to make a profit.
The main indicators, such as the fall of the stock market and political turmoil, usually imply a future devaluation of the country’s currency. Similarly, when the central bank announces that it will print more currency, it may indicate that it is another time to invest in gold.
But, when the monetary value is robust and short-term inflation is unlikely, gold prices cannot grow.
But, if gold-consuming markets like jewelry and electronics foresee more demand, we may invest in gold to profit from price pressure.
In practical terms, however, a passive buying and holding investment strategy may be best for the regular gold investor. Since economies tend to be cyclical, buying gold when the price falls is better. This way, we will not have to worry when others decide to buy and the price increases.
How do I invest in gold?
There are many different ways to invest in gold; choosing one or the other will depend on the modality most appropriate for our lifestyle and circumstances.
- Buy gold directly. We can buy gold directly in the form of bullion or coins. It is the most traditional way to invest in gold, although it carries more risk when it can get lost or even stolen. If we want to keep it safe, we must pay for specific insurance.
- Acquire shares in a company that is dedicated to the sale of gold. The second option is to buy shares in a company that produces gold, such as a gold mining company. Although it is not a direct investment in gold, the value of the shares will be strongly correlated. At the same time, what happens in gold mining mines will also directly impact their value. There is also the possibility that, by having gold, they will pay us dividends for the shares.
- Through gold futures contracts. We can invest in gold through financial derivatives specialized in gold investments, such as buy and sell options.
- Invest in a gold ETF, that is, in a fund listed on the stock exchange that specializes in a range of gold securities. This diversification can minimize your risk a little.
Is it profitable to invest in gold?
Before investing in gold, we should know in depth what type of investment we will make and the value of gold at that time. In addition, we will consider exactly how much it will cost us to store and secure the physical gold. Do we know the tax differences between investing in ETFs (lingotes), gold on paper (investment funds), or gold coins (mining companies)?
Finally,The timing of gold purchases and sales, especially if we don’t buy actual gold, directly affects profitability.
Knowing all those details will definitely help us decide if investing in gold is profitable.