Pros and Cons of Investing in Gold

Advantages and Disadvantages of Investing in Gold Advantages of Gold Investing Probably one of the biggest advantages of gold investing is that, the demand for gold is always more than that it is supplied. This statement is especially true in case of the Middle East nations which are now touted to be the largest consumers of gold. Take the case of India; it is a known fact that India emerged as the largest consumer of gold with the world gold council quantifying it at 737 tonnes a decade back. Apart from this there is a flexibility to buy and sell gold quickly. There would be little effect upon the price. This ensures that there is little or almost zero risk of a decrease in value. Another factor that impresses is that gold is now being treated as a hedging tool in the investor’s portfolios. This is because of the near zero risk of value depreciation it offers. Investing in gold online has now become a reality. Investors can now buy, sell and virtually trade in gold commodity just like any other stock or equities. This has become a major factor that supports gold investing because investing online reduces the risk of actually owning the metal. There are also options wherein you may possess physical gold however. The market for gold has the support for banks globally with their official share estimated at 20% in the official gold reserves. The gold price does not rely on strength of the currency i.e., a decrease in the value of the dollar doesn’t have a negative effect on its price. Last but not the least, the price of gold is not influenced by any kind of political instabilities or crisis. Reasons to invest in gold The price of gold has been going down since 1980, and gold is cheap. If you are a contrarian investor who believes in buying when prices are low, now could be a good time. Once the price of gold starts to rise, banks which have large gold reserves will not want to sell it cheaply. Several gold funds have hit yearly lows, so a pick up may be imminent. The American economy could be slowing down. A decline in the value of the dollar could lead to soaring gold prices. Consumption of gold has exceeded production for the past 8 years, and with gold prices dropping; some gold mines have decided to scale back production. This could lead to an eventual upswing in the price of gold. With Asian countries recovering from the financial crisis, gold demand is picking up. Disadvantages There is also another side of the coin. First and major disadvantage of gold investing is that gold doesn’t provide any instant appreciable income. The value of the income has to be seen over the long term. There can be several ways to invest in gold. Investment in the form of jewelery is one form of gold investing. However, this form of investment attracts a lot of care to be taken to prevent it against damage. This is especially true when you trade with gold jewelery. Raw gold is another form of gold investing. This is not at all suitable for those dealing with large quantities. There would be additional costs like insurance and storage costs involved when you trade and invest in large quantities of gold. Reasons not to invest in gold Price of gold has been mostly going down since 1980 Central banks have tonnes of gold bullion which they could sell at anytime, thus flooding the market and bringing down prices even further. Gold funds have not been doing well for a long time. Even though gold funds are less volatile than investing in gold per se, it still is a risky investment. Investors must contend with brokerage fees, dealer markups, and storage and insurance costs (if you’re buying a lot of gold). Gold bullion or coins do not produce yields the way bonds and stocks do. ************************************************************ Pros and Cons of Investing in Gold – How Gold Stacks Up Against Risk Types of Investment Risk credit risk liquidity risk market risk Investing in Gold – Credit Risk There are generally three types of risk that are involved in making an investment. The first is a credit risk. Credit risk is the risk that a debtor will not pay such as with mortgages. One of the pros of investing in gold is that this risk does not apply. Gold is not a liability to anyone. Unlike currency investment, gold is not effected by any country’s issuing policies or economic policies. Investing in Gold – Liquidity Risk The second type of risk is liquidity risk. This is the risk that when you wish to sell the commodity in question, a buyer will not be found. Gold is constantly in demand all over the world and thus has a relatively very low liquidity risk because of 24 hour trading and a wide range of buyers from other investors to the jewelry and manufacturing sectors. In addition, there is a wide range of investment options for gold including coins, bars, jewelry, futures and options, exchange traded funds, and certificates. Investing in Gold – Market Risk The last type of risk involved in making an investment is market risk. Gold is subject to market risk, but many of the cons to investing in gold are very different than other investments which actually enhances investing in gold as a way to diversify your portfolio. The risk to gold prices happens in the short term when a rather large investor decides to liquefy a substantial amount of gold rather quickly. While the price of gold would be effected in the short term, because of the stability of gold production, it is unlikely to have any impact on equity returns. Likewise the risks that are inherent in bods and equities during an economic downturn do not apply to investing in gold. One simple measure of the market risk of a commodity is the volatility of the market. The more volatile a market is, the riskier it is to invest in it. Historically gold price is less volatile than any other commodity prices. Any sudden increase in demand for gold can usually be met with relative ease because of the large above ground stock of gold – of which nearly 20% are held by banks. Pros and Cons of Investing in Gold – Conclusions In conclusion, the pros of investing in gold derive primarily from the differences between gold investment versus other types of investment. Investing in gold incurs no credit risk, very limited liquidity risk, and a different type of market risk than stocks, bonds, or foreign currencies. Gold can be traded either in the short term or used as a protection of wealth as gold is not subject to inflation in the manner of paper currencies and gold’s value is not based on the economic whim of any country. An interesting question was posed in November 2005 by Rick Munarriz of Motley Fool .com as to whether a share of Google or an ounce of gold were a better investment. At the time, both were valued near $700. As of this writing (6-12-2009), a share of Google closed at $424.84 USD while the current gold price per oz. In USD is $939.10.

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