Since the commencement of the stock markets, gold has gained quite the reputation to have a negative correlation to stocks while having a positive correlation to inflation. But what is the history of gold?
For as far back as 550 B.C., gold coins were minted and have been used as a currency and a symbol of wealth. Just like in the movies, treasures found from as early as 4000 B.C. also contain gold.
In the 1800s, many countries and federal reserves adopted the gold standard, which involves fixing the value of their currency to the price of gold. But today, the gold standard has been dropped and replaced by freely floating fiat currencies.
What makes gold so special for investing?
Traditionally, gold has been regarded as a stable option to hedge our money against inflation and maintain its purchasing power. The idea is that because the demand will always be there, people will still pay for it even if the price increases.
But that’s not enough to justify a decision to buy, so here are a few more to help you better understand this asset:
Reasons to invest in gold
- The best asset to defend against inflation, devaluation, and market crash.
- The best asset to ‘get rich slowly’.
- A universal currency. That means even if the ringgit crashes tomorrow, the worth of the gold you have will not drop in any way.
- Not subject to price fluctuations that affect stocks and securities.
Reasons not to invest in gold
- There is a storage and insurance cost.
- It does not have any utility at all.
- The price of gold is completely determined by supply and demand.
- Limited upside. You can only get rich very slowly.
Ways to invest in gold
Just a few hundred years ago, gold was only available to buy in physical form. But today, there are more options than that.
Gold bars (bullion) and coins
This is the most obvious way of owning gold. If you want to buy yourself some gold, go to a bank.
But, there is a catch to buying gold so casually.
You’ll be faced with a number of issues down the road. For example, you’ll need someplace safe to store it. If it gets stolen, it is very hard and costly to retrieve it, and also the cost of insuring your physical gold.
This is similar for both gold bars and gold coins except that there are increased demands on the quality of the coins. Buyers generally demand it to be in pristine condition before making the buy. Ergo, damages to your gold coins might reduce their value.
Gold mining stocks
The very first thing to understand when investing in gold mining stocks is that it is different from purchasing precious metals.
You won’t be owning the metal directly, instead, you’ll only be possessing shares of the company. On top of that, the price of gold won’t affect your investment in any way. What affects it becomes the factors that affect share prices such as competition, earnings releases, supply, and demand.
But the good news is that investing in stocks opens your doors to receive dividends.
Exchange-traded funds (ETFs)
ETFs, or exchange-traded funds, are publicly traded investment funds. Think of it as a basket that contains a bunch of different assets. However, gold ETFs have gold as their only asset and their stocks follow the movement of the metal’s price.
The biggest benefit of this is getting exposure to a number of different companies without worrying about the downsides of having physical gold.
Generally, the cost of investing in a gold ETF is much lower than outright owning it but it’s not to forget about how the management company or the broker can impact your investment.
When should you buy gold?
Investing, whether it is gold or stocks, physical or non-physical, is a complicated decision and not one to be taken lightly. If you do decide that gold is a good asset to add to your portfolio, make certain you are buying from a reputable dealer. It is always safer to pay a little more for authenticity than getting cheated on.
The idea of investing in gold shines especially bright as a defensive asset during a recession.
But apart from that, no matter how precious this precious metal is, it doesn’t provide any immediate benefits and does not pay dividends.
Like all financial assets, gold has its own set of risks to be considered. Just make sure you are well educated before making the decision.
Disclaimer: Neither CompareHero.my nor the content on it is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. The content on CompareHero.my is for general information purposes only and is not intended to be personalised investment advice or a solicitation for the purchase or sale of securities.
Compargo Malaysia Sdn. Bhd. and/or its affiliates cannot and do not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. CompareHero.my may receive compensation from the brands or services mentioned on this website.
On another note, if you're thinking of investing in something else such as cryptocurrencies, you can get more information below: