Is buying gold a good investment?
Advantages of buying gold
- Liquidity. Gold can be easily converted into cash anywhere in the world. Aside from actual cash, the liquidity and universality of gold is unparalleled.
- Holds its value. Gold tends to maintain its value over time. Economists argue that even the price of gold is not indicative of its value. That is, even if the price decreases, the underlying value of gold does not change much. This is largely because there is a fixed quantity of gold due to the fact that it is a commodity, whereas the U.S. dollar, which is a form of fiat currency, holds no inherent value.
- Hedge against inflation. Gold rises in value when inflation takes hold. Since gold is priced in U.S. dollars, any deterioration in the dollar will logically lead to a higher price of gold. As a result, during inflationary times, gold offers a much more stable investment than cash.
- Diversification. Adding different securities to your portfolio is an essential way to diversify and lower the overall risk of your investments. Moreover, because gold often moves inversely to the stock market and currency values, it provides an especially effective way to diversify.
- Universally desired investment. Gold is still a universal commodity. Although countries sell their currency futures, treasuries, and other securities around the world, unlike gold, they are subject to political chaos.
- Gold is used as an input in products. Since gold is used in the production of various products including jewelry and electronics, there is a reliable demand that further stabilizes the price of gold. Moreover, in times of increased demand, these markets can force the price of gold higher.
Disadvantages of buying Gold
While gold can be a great investment for a number of reasons outlined above, be aware of the disadvantages before investing:
- Gold doesn’t earn passive income. Other investments such as stocks and bonds may derive a portion of their value from passive income in the form of interest and dividends. However, the only return you can make on gold is when the value increases and you decide to sell.
- Gold can create a bubble. In turbulent economies, many people start investing in gold, but when investors start to panic, gold can become overpriced. This, in turn, means that your investment could lose value once the price corrects itself.
- Need physical storage and insurance. If you choose to buy actual, physical gold, you will not only need to store it, but you will need to insure it as well. Otherwise, you won’t be able to replace it if it becomes damaged or stolen.
- Capital gains tax rates are higher on most gold investments. Since gold is considered a collectible in the U.S., the capital gains tax rate is 28%, which is much higher than the ordinary capital gains rate of 15%. That said, mining companies that don’t invest in gold directly are still taxed at the ordinary rate.
- Increases in gold value coincide with local currency devaluation. Many economists argue that gold only increases in value when the dollar is devalued or inflation is strong. As a result, critics feel that gold doesn’t offer adequate returns in other markets.