7 Reasons Why An Investor Should Buy Gold
Updated: Nov 19, 2019
In our humble opinion here at Gold IRAs 101, the average investor should own Gold as a part of their overall investment portfolio. There are many reasons why investors should diversify in gold, here are seven reasons why a portfolio should include it.
Global Tension Hedge
Gold Supply in Decline
Increased Demand for Gold
U.S. Dollar Weakness Hedge
Gold Pros vs. Cons
Protection Against Deflation
Deflation occurs when prices of an economy decrease due to lower than usual business activity. Deflation usually occurs when the economy has too much debt. An excellent example of a deflationary period was the U.S. Great Depression. In the 1930s, the Great Depression caused the prices of products to drop sharply while the purchasing power of Gold increased. The safest investment during this time was in Gold.
Global Tension equals Safe Haven
Historically gold prices had done well when there was global tension between governments. Gold is a safe-haven when governments are not managing affairs appropriately. People tend to flee to Gold when global pressure rises. This is true when there is a crisis within the region. A crisis could include a currency, financial, conflict, or a trade crisis.
Gold Supply on a Decline
Most central banks worldwide have been selling their gold bullion since the year 2000. Since 2000, the amount of Gold sold from these central banks has decreased. Along with the decrease in Gold sold worldwide from banks, gold mining operations are declining. Since 2007, gold miners have not increased their output of Gold. The reduction of the supply of Gold should lead to higher prices in the future.
Increased Demand for Gold
The demand for Gold is growing globally. Gold can be found in production anywhere in the world. Gold is used to produce computers in the U.S. Gold is used to create jewelry in India. Gold is demanded in China as a traditional form of savings by its population. Demand for Gold will grow globally. The increase in overall demand should push Gold Bullion prices to higher levels.
Inflation occurs when prices in an economy rise. Typically, inflation is measured by the cost of living in a particular marketplace. When the cost of living increases, the price of Gold tends to increase. This is because the value of the local currency loses its value during inflationary periods. During inflation, the value of Gold will increase while the fiat currency loses value. Gold is a great way to store the value of earned money when the fiat currency is losing importance.
To adequately diversify against risk, a prudent investor should invest in Gold. Gold is negatively correlated to stocks and other financial instruments. Having negatively correlated investments in a portfolio helps the overall portfolio’s risk factor. By lowering the risk the total portfolio can have steadier returns.
U.S. Dollar Weakness
The U.S. Dollar is viewed upon as a valuable reserve currency. In recent decades the U.S. Federal Reserve has increased the money supply to stave off deflation. This action increased the value of Gold to over $1000 per ounce in 2008. Gold almost doubled in 2012 after the Federal Reserve completed the planned increase in the supply of money.
Whenever the U.S. economy experiences an economic slowdown, it is expected that the U.S. Federal Reserve will get involved to prevent deflation. This is good for Gold because the U.S. dollar will become weaker and push the price of Gold to higher levels.
Any investment asset has a downside. However, Gold comes with a unique downside risk that is not inherent in other investments. Gold has not performed well against more riskier investments out there. Gold is not a passive income asset. To purchase Gold the purchaser will have to take into account premiums and taxes. Storing physical Gold can be dangerous, this is why we recommend owning physical gold in an IRA.
It Is Said Gold Under Performs
Investment strategists that love stocks and bonds will point out that Gold is an under performing asset. They will mention that if a person who invested $10,000 in Gold 200 years ago would have only $26,000. Those who invested in stocks would have about $5.6 million.
However, in the past 50 years, Gold has performed just as good at the S&P 500 stock market index. The S&P 500 has grown from about 80 points to around 3,000 points since 1970. This is a 38 times increase. Gold has risen from a value of 39 in 1970 to about 1,500 today. Again, this is a 38 times increase.
Proponents of Gold investing point out that governments all over the world are increasing inflation due to excessive money printing that could have helped Gold’s performance in recent history. In addition to this, gold proponents point out that the U.S. dollar was lifted off of the gold standard in 1970 thus increasing inflation more rapidly than in other eras. The substantial money printing of governments all over the world should help gold prices see new highs.
Gold is NOT a Passive Income Asset
Prudent investors like to see that their investment is compounding and increasing in shares. Stock and bond investors reinvest dividends, interest, and capital gains. The reinvesting of passive income from these investments gives the investor a feeling that the investment is compounding.
Gold investments do not pay periodic dividends or interest (we believe this to be a pro- we’ll discuss in another article) Those investors who appreciate dividends and interest will not like Gold as an investment….but there is more to an investment portfolio than just dividends and interest, Dividends and interest are taxed as income. So, if the investor prefers not to pay dividends or interest tax, they may want to consider Gold.
Premiums and Taxes - Uncle Sam Wants His Share
Buying Gold comes with embedded costs. A seller of gold bullion (physical Gold) will markup the price of the Gold so that the seller can profit from the sale. The investor is at a loss immediately upon purchase of the gold bullion. The investor will have to pay taxes if the Gold is sold at a gain. Investors in Gold should keep this in mind when they decide to buy Gold.
Storing Physical Gold
Storing physical Gold can be difficult for someone who has not held precious metals or jewelry before. An investor in physical gold bullion should ensure that no one knows about the valuable metal investment. The precious metal should be stored in a place that no one can reach except for the investor. Lost or stolen precious metals held in a home is not likely to be recovered.
A safe alternative to investing in Gold is buying physical gold via an IRA. When doing this, the storage issues are mitigated. Reliable dealers offer investment packages so that investors can store their Gold in a secure location. We recommend Regal Assets if you are interested in learning more about Gold IRAs and reputable Gold IRA companies. Contact them via the links and they will send you a free, no obligation educational investment kit. They are a couple of the highest rated companies in the industry who deal in Precious Metal IRAs.
At the end of the day, investors should consider investing in gold as a portfolio diversification strategy. Gold performs well in tumultuous times. These times include market downturns, economic turmoil, global tension, and high inflation. When Gold performs well during this time, an investor should take note of this and invest a portion of their portfolio in this precious metal.
Gold had performed as good as the S&P 500 since 1970 when Richard Nixon took the dollar off of the gold standard. The weakening U.S. dollar since 1970 could be why gold prices are continuing to stay at around record levels. Knowing that Gold performs well during poor economic conditions, the investor should put a portion of their portfolio into Gold. This is so the investor can lower the overall risk and volatility of their portfolio.
Investors should invest on average anywhere from 10 to 15% of their portfolio in Gold. The best way to do this is take physical ownership of gold in an IRA, in our opinion. The benefits are many.
If you decide that a Gold IRA or a Gold 401k rollover or maybe even a transfer may be right for you and you want to learn more we encourage you to request more information from Regal Assets. They will send you a free, no hassle Gold Investment kit once you click on the link below.
To see a review on Regal Assets, visit our site at GoldIRAs101.com We have personally used these guys for our gold investment purposes and highly endorse them.
The Gold IRAs 101 Team