- The Insider Memo
- Is it a Good Time to Buy Gold?
Is it a Good Time to Buy Gold?
The value of your savings is depreciating. In order to preserve your wealth, buying gold now for the long-term makes sense. It can be part of a diversified investment portfolio.
Building vs preserving wealth
TLDR: The value of your savings is depreciating. In order to preserve your wealth, buying gold now for the long-term makes sense. It can be part of a diversified investment portfolio.
Investing in stocks only makes sense if you are willing to trade and manage your positions actively, rather than buy-and-hold. That's what I try to do with all of my investment strategies; build wealth over time.
Let's take a look at this ratio chart above that compares Gold vs stocks listed in the Dow Jones Industrial, from 1897 to 2021. The ratio is at historic lows and clearly favours gold over stocks. The chart only analyses the price data and ignores the time data. Current asymmetric reward vs risk profile is in favour of gold.
This chart analysis considers price only; it doesn't take 'time' into consideration.
Current economic narrative is one where investors are worried about inflation over the coming months/years along with a crashing dollar value. So, I anticipate the market sentiment to shift in the favour of gold (commodities in general), which should cause gold prices to rise again.
Reasons for buying gold:
Wealth preservation: Gold has gone up in value in comparison to all fiat currencies; that's the nature of fiat currencies. Due to inflation, a £20 note can not buy as much as it could have a year ago; compounded over time and you have a note that is losing value over time. Why is it called "saving"?
Safe Haven: Gold serves as an insurance policy during adverse economic events as it can not be printed by the governments to control its supply and demand. It's a scarce asset.
Hedge: Gold is not impacted by depreciating dollar and rising inflation rates. In fact, gold prices often appreciate when the value of dollar falls. That's exactly the situation we are in now.
How to invest in gold?
Physical gold/Bullion: It is is the physical metal itself in a refined format suitable for trading and can appear as gold bars, ingots or coins. Investors can usually purchase these from a precious metals dealer, bank or brokerage on the internet or in person. Physical gold cannot be stored as easily as other financial assets. It takes up lots of space and comes with the additional risk of loss or theft.
Gold ETF: Owning physical gold comes with issues of storage, insurance and other costly fees and gold mining companies can be a speculative investment. It is no surprise, therefore, that Gold ETFs have proved as a popular way to gain exposure to gold, without the need to store it.Exchange-traded funds offer exposure to the gold market as many ETFs track the movements of the commodity. Additional to this, ETFs can be considered a more liquid and less-costly investment compared to owning physical gold.
Gold mining companies: Another option is to purchase gold mining share, which are known to be riskier than physical gold. This is because you have to take into account a business’s success separate from the price of gold. However, mining companies are typically a speculative investment, so you have the opportunity to make, or lose a lot of money. Nevertheless, you do not have the security of physically owning the gold if the gold stocks prove to be unsuccessful.