Why Invest in Gold?
Imagine something like this taking place:
- The consumer price index rises 6.2% in one year its fastest surge in more than three decades.
- Inflation begins to accelerate faster each and every month far outpacing the 2 percent annual gains the Fed plans for as an average.
- Shortages in new and used cars and supply chain issues make the price you pay for consumer goods shoot through the ceiling.
Does this sound familiar?
It should because it is happening right now and has been since the beginning of the current administration! Here is an article from the New York Times that verifies the information above (Smialek, J., 2021)
Inflation and the Price of Goods Soar!
Look at this chart from the Bureau of Labor Statistics that shows annual price changes of consumer goods from October 2020 to October 2021:
It is pretty alarming how fast inflation has risen in this past year due to the current administration’s policies.
Question: How do Smart Investors Handle Rising Inflation?
How Gold Fights Inflation and Hedges Your Investment Portfolio
In my opinion, these two images provide the most compelling reason to include gold and precious metals in your investment portfolio, whether it is through a 401k to gold IRA rollover, or by simply purchasing and holding physical precious metal assets.
The charts show a comparison between the value of the dollar and the value of gold during the same time period between 2002 and 2008 which was the beginning and the period through the last big recession during the bursting of the real estate bubble.
It is plain to see that the value of the dollar dropped drastically while the value of gold rose drastically.
If you would have owned gold in your investment portfolio you would have been hedged against the decline of the dollar because as the dollar fell, the price of gold rose to fill the gap and absorb the loss.
Here is another chart that shows the dollars relation to gold during the height of the recent COVID-19 pandemic:
You can clearly see that the value of the US Dollar dropped drastically in sharp contrast to the value of both gold and silver!
If you held gold in your portfolio, you would have been hedged against the value of the dollar.
You are protecting your investments with a portfolio that includes gold.
According to millionaire financial expert and analyst, Peter Schiff, both gold and the US Dollar work hand in hand.
So, when the dollar increases in strength, gold prices begin to take a tumble, and when the dollar plummets, gold prices begin to take flight.
Instead of taking a hit in your traditional IRA, supplement it with gold and you will decrease the loss in your stock-based IRA accounts.
There is no question that gold should make for an adequately diversified portfolio. But why invest in gold and is it beneficial to your investment strategy?
Well, quite simply, gold is and will always remain a universally finite currency, which all central banks in the world hold.
Did you know that almost all central banks globally, became net buyers of gold in 2009?
That was the very first time that this happened since 1988.
In 2009, the Indian Central Bank purchased approximately 200 tons of gold from the International Monetary Fund, which has been deemed as the single biggest gold purchase to have ever occurred in a limited time period, which is 30 years.
In the same way that you cannot consider your family home as an investment, it is important to understand that gold bullion can also not be considered as a viable medium of investment per se.
Instead, gold bullions offer a financial back-up when you’re experiencing a ‘rainy day’, rather than an investment it is considered as savings.
So, gold bullion should either be in your personal possession or given to a third party for secure storage – however, it should never be traded.
Have ever heard anybody trade their insurance policy?
Well, it is primarily because any form of insurance is a powerful form of financial backup and security, which is why one must never trade physical gold.
It is important to understand that gold is and will always be regarded as a strong, safe-haven asset, which can be converted into money when the time and need require so.
Gold is also a very effective if not the perfect way to preserve wealth and ascertain that it gets passed down from generation to generation.
And once you successfully incorporate a core holding of gold bullion into your investment portfolio then different but relevant investments like those in mutual funds and mining stocks as well as a variety of speculative and critical gold investment options can be taken into account.
What is the Best Way to Invest in Gold and hedge Your Portfolio Against Inflation?
There are many different ways to become an owner of gold. You can buy physical gold (including gold coins), gold ETFs (Stocks basically), and gold mutual funds.
But perhaps the best way for most of us to buy gold is through a gold IRA/401k rollover.
What is a Gold-Backed 401k to gold IRA rollover?
First, a gold-backed IRA is a method of retirement investing that is approved by the IRS.
Instead of containing investments in stock, bonds, or mutual funds like a traditional IRA, a precious metals IRA allows you to purchase gold and other precious metals with pre-tax money and receive the same tax advantages that you would in your regular retirement account.
A 401k to gold IRA rollover is a Self-Directed Individual Retirement Account that allows you to roll an existing 401k into an account that allows you to physically own precious metals such as gold, silver, platinum, and palladium tax-deferred.
These precious metals IRA accounts are not associated with stocks and bonds like traditional IRA’s but instead contain physical assets inside of the portfolio.
Whether you choose gold, silver, platinum, or palladium, your metals are stored on your behalf in a secure IRS-approved depository until the time of your retirement.
A gold-backed IRA along with a traditional IRA allows you to hedge against inflation and mitigate losses in the event of an economic downturn.
The purchasing power of gold-Gold is Valuable
So, does gold have any value or not? Well, that is a good question.
However, there has been a merciless battle raging for quite some time now regarding whether or not investors should consider including gold in their portfolios.
On the subject of whether or not gold has any value or not, Warren Buffet completely disagrees.
According to him, gold is worthless, he stated that gold is getting dug out from beneath the ground in Africa or some other country, melted, buried in a hole again with people getting paid to protect and secure it. He says gold carries zero utility.
While Warren Buffet being an investment tycoon is right on a plethora of things when it comes to the financial industry, this is something that he couldn’t be more wrong about.
Here, it is important to understand that the people who deny gold as a viable addition to an investment portfolio analyze and evaluate its utility under the microscopic view of a standalone asset.
They only regard gold’s absolute value and disregard it as fiction.
This is the point of view and the perspective is completely wrong.
Gold’s value is eternally relative. And that is primarily because of the fact the value of gold will always be relative to any other type of asset, the economy, or the currency, for example, GBP, US Dollar, Euro, etc.
In simpler words, the value of gold is just the same as a gallon of milk stored in the fridge before you’ve had a glass of it, but the value of gold will also be relative to the cost of production associated with producing, processing, and packaging that gallon of milk.
With that being said, it is agreed that the absolute value of gold can remain the same throughout its frighteningly long history; you have to realize that its relative value today is also subject to the same factor of fluctuation that affects global currencies like the Euro or the US Dollar.
So, you may get more currency for your gold in less fluctuating markets and at the same time, you may get considerably less currency for your gold when things are a bit shaky in the economy.
However, whenever inflation bloats, which it will, the value of the currency will be subject to considerable depreciation – while relative to this depreciation of the currency, the purchasing power of gold will begin to significantly rise and will go higher.
The Price of Gold will Soar Higher Again
According to millionaire financial expert and analyst, Peter Schiff, both gold and the US Dollar work hand in hand. So, when the dollar increases in strength, gold prices begin to take a tumble, and when the dollar plummets, gold prices begin to take flight.
And looking at today’s economy, the US dollar is undeniably getting stronger, however, it is important to consider the possibilities of the fact that this growth in currency is not wholly supported by the rest of the globe, including other western economies.
The Federal Reserve’s dollar printing speed has tipped the scales and has become exponential; however, this also constitutes creating an inflation bubble, which can pop at any time.
Although it is surprising that inflation seems to be stagnant, and in some situations declining – which has undoubtedly had a lot of economic and financial experts puzzled.
But it is a given that this situation is not going to be eternal, you have to understand that the economic pendulum is a looming sword that is always looking at a way to strike the economy, and it is just a matter of time until does – which is why you should be ready.
How To Incorporate Gold in Your Investment Portfolio?
Due to the fact that the U.S. government continues to mishandle the American economy, we recommend that investors place 10-20% of their liquid into gold bullion.
I know this sounds extreme but even if the economy stops improving and the price of gold remains low, gold is still a safe investment during times of economic upheaval.
This is not a matter of inflation or deflation, it’s about protecting your assets in a crisis.
This is the main reason for owning gold in your portfolio.
There is no better way to own gold than having it physically and in your possession.
Where To Purchase Physical Gold
A good place to start your search is to purchase physical gold in your local area.
A local gold dealer is a good place to start if you are making smaller purchases.
Most investors buy their gold from a local dealer or online.
You need to be careful because just like any other business, there are unethical dealers that will rip you off.
Do not dabble in the numismatic coin world unless you are a very knowledgeable coin collector.
There are many other online gold dealers, you just have to do some research to make sure the one you choose is legit.
Make sure you figure the total cost when choosing a gold provider.
Things to consider are the price of the product, insurance, shipping, storage fees etc. If a dealer claims they need weeks to locate your gold, I would pass on them and seek to invest somewhere else.
Always lookout for the hard sell.
Some dealers will try to try and sell you add-on products like rare coins or proof sets. Things you may not want or need.
The dealers we recommend are pretty good at not doing this.
Where Do I Store My Gold?
There are always risks involved when attempting to safe-keep your investment. Your stash could be subject to theft or loss. Just like other forms of gold ownership are subject to mismanagement or fraud.
A wise move is to diversify your gold ownership into more than one form and physical location. Most of your own type should be in physical gold though.
A Good Gold Accumulation Plan
You can accumulate gold over a period of time by purchasing a set amount every month. You can invest $100 a month in gold and accumulate the metal slowly. The money can even be taken directly from your account.
This is an alternative to dishing out a large chunk of money at one time to fund your investment.
You can look at it like a thrift savings plan or one of those Christmas savings plans where the money is debited automatically from your checking and placed into your savings.
These types of programs will store your gold for you also, and you can take possession of it any time you want.
Two good automatic accumulation plans can be found at MetalStream and SilverSaver.
These companies have plans that will automatically deduct the funds from your account and then use the money to purchase gold or you.
Check these companies out to learn what their monthly minimums are and where they store your gold for you.
MetalStream and SilverSaver are the best choices if you plan on eventually taking possession of your metals. There are other companies out there but some of them will not deliver your metals to you. Just make sure you do some research and find the one that fits your needs.
Gold Mining Stocks
Purchasing stock in a gold mining corporation will enable you to expose your portfolio to gold indirectly.
Several experts in portfolio management recommend new as well as existing investors to aggressively seek small gold mining corporations, which have rock-solid balance sheets and impressive working capital to efficiently supplement their day-to-day operations.
Investing in mining stocks can be a highly effective medium for growing your portfolio because you will be investing in potentially growing companies.
And if you look at past trends in mining companies, they often exponentially grow in time and are then acquired by even larger companies and corporations.
Gold Bullion Mutual Funds
Investing in a successful and viable gold bullion mutual fund is another way of efficiently and effectively incorporating gold in your investment portfolio.
However, it is important to realize that not all gold bullion mutual funds spend money on the real stuff. According to financial planner Tim Higgins, mutual funds related to precious metals invest money in mining companies and not the precious metal itself.
Therefore, it is a given that pricing will be significantly affected by the market elements that transcend the price of the actual commodity.
Invest in Gold Exchange Traded Funds
Another viable way you can incorporate gold in your investment portfolio is through buying gold exchange-traded funds.
Exchange-traded funds are basically individual intangible containers of stocks, similar to mutual funds, but different in the way that ETFs are subject to continuous trading in the financial markets, just like stocks are.
ETFs are not priced once every day, which is in the case of mutual funds.
By investing in gold-backed ETFs you aren’t purchasing physical gold, but rather, you’re buying an investment, which tracks and monitors the price of the commodity itself, which is net of the entire fund’s expenditures.
Smialek, J. (2021). Fastest Inflation in 31 Years Puts more Heat on Washington. Retrieved from: https://www.nytimes.com/2021/11/10/business/economy/consumer-price-inflation-october.html