Why to invest in gold and how?

JANUARY 30, 2015 BY CHUCK FREEMAN

There are many types of financial vehicles for your money out there, and everyone has a different opinion about which one is good and which one is bad. Let’s face it: it can make things a little confusing. Each one of those vehicles have specific characteristics and are good to reach specific goals under specific circumstances.

This article demystifies the process of investing in gold.

Why investing in gold?

Gold has always been good for long term investment and especially when the economic landscape became unstable. Having said that, it’s a good practice to save money for your old days.

Gold has historically maintained its value and have always been the best way to pass wealth to the next generation. This case does not apply to any currencies, because they are bound to lose their value overtime just like anything else in life.

You can be sure that if you stash some gold coins somewhere and your descendants put their hands on them 500 years from now, it will still worth a lot, probably even more than now. Thus keeping the future value of money in mind gold can be a valuable and long-term investment.

Even real-estate, which historically has been great for long term investments, passed a certain age, the value of buildings tops, the maintenance fees climb thus making it less profitable, and then later on, prices start going down until the day it becomes ready for demolition. Also, be prepared that all sorts of crazy shit will happen along the way like floods, meth head occupants, mold, changes in city law, competition, market crashes, fires, interest rate fluctuations, damage caused by punks, etc…

That’s why the figure of speech “This is solid gold!” means gold is always a safe bet.

There is a link between the price of gold and the price of currency. When the economy is doing great, the price of gold goes down a little. It still follows the market but nothing makes it an especially good short term investment. The reason for that is because people are willing to take more risk since the economy is good, so less people invest in gold, thus keeping it low profile.

But when things turn to shit, the price of gold climbs up drastically.  At the end of the last great economic bubble, and the beginning of the recession between 1999 and 2008, the price of gold tripled, and then from 2008 to 2012, when the recession started to look more like depression, that price doubled again.

The reason for this is, because a lot of big players bought gold to keep their money safe.

Gold is good in times of inflation, deflation, recession and depression. Basically, anytime the economy is not doing great people start to fear for their money, hence they buy gold, which reduces the supply.

We also have to consider the fact that we are getting more and more people on this planet and that gold is used in a lot of jewelry and high-tech products which are now mainstream even in poor countries. Meanwhile, the mining and refining of gold is more and more expensive, and this resource is getting harder to find year by year. The cost for mining companies has been on the increase for a while now, and they are not in any position to raise the supplies at all. This situation gives a solid foundation to gold as a strong long-term investment.

It is not such a good financial vehicle if you want to make short-term profit because the fluctuation of the market could make you a loser, and even if you win, it’s not going to be so good unless you bought it just before an economic catastrophe.

Investing in gold will make you a winner for something like investing a certain percentage of your retirement savings.

It’s always a great way to diversify a portion of your assets that you do not have immediate need for.

Even if the economy totally collapses, if you have 20% of your assets in gold, this 20% will probably worth 4 times more during the transition period to the new economy; basically, you will not have lost much during the crash. It’s kind of a way to make your portfolio bullet proof.

How to invest in gold?

There are 5 main ways to invest in gold and they are as follows:

Physical gold

This is a great way for people who are new to investment or don’t have the knowledge of how the financial world really works and want to keep full control over their investments. Gold coins and bullion can be bought based on size, purity and source. It is also very secure against complex fraudulent financial maneuver by those wall-street geniuses, hackers or even the infamous electromagnetic pulse. It is also highly portable and liquid, and at the time of writing this article, 1 ounce of American Gold Eagle Coin is worth 1266$ USD. They are rather convenient, for you can travel with them in your pocket around the world and trade them for local currency about anywhere you want.

Just find a trusted dealer nearby or on-line, make sure to check his reputation first, and everything is going to be peachy. Take a look to JMbullion, this is a good one!

The bad side of this are insurance fees. So it’s better to not make too many transactions. Also, keep that a secret and don’t show your gold coins to all your friends just to impress them; it would be the best way to end up with armed bad guys with guns in your house. Have some common sense.

Gold certificates

You can also buy gold certificates that allow you to buy some physical gold without making deliveries. The issuing bank will keep the gold in their safe, still charge you for insurance and storage fees, but in return, you will have a paper that says it’s yours.  The banks then will just hope your dog will eventually eat the certificate just to keep your gold for themselves. So make sure it does not.

Gold mining stocks

Another way, which is more complex, is to buy mining company stocks. It is not complex in the sense that you can buy stocks online with just a few clicks on the mouse. What is complex is to choose the right company. The value of mining stocks can follow the price of gold, but when a company invests billions in a new dig, and they pull out less than expected, the stocks will be affected negatively. You need to follow the company you consider to invest in very closely. How it is run and what challenges they face are crucial to keeping tabs on your investments. You must also keep in mind the socio-political landscape of the different countries as well as where their mines are located.  If you’re not well informed, this investment could quickly turn out to be nothing more than a risky gamble.

If you are interested by this option you can start by looking at those guys:

GOLDCORP, Inc. (GG)
Agnico Eagle Mines Ltd (TSE:AEM)
Kinross Gold Corporation (TSE:K)
Yamana Gold Inc. (TSE:YRI)
Barrick Gold Corp. (TSE:ABX)

Gold Futures

For those who are a little bite more savvy about how those financial markets work and are not afraid to gamble with some jazzy financial tools offered by stock brokers, you can buy gold futures contract. Basically those “futures” contracts allow you to buy today a quantity of gold on a future date at a price set in advance. If the price of gold turns out to be higher than the price you paid for it in your contract, you will make a profit when this future date comes. This is known as an “investment instrument” but it must be realised that this is in fact nothing more than gambling; it is just one thing to keep in mind.

Exchange traded funds, a.k.a index

Exchange traded funds track the price of the gold index, which is a statistical measure representing the gold market. Those funds can be bought on margin, sold and shorted exactly like any other stocks. This allows you to trade “gold share” the exact same way you would trade corporation stocks. Those funds will behave like stocks during the course of the day as they are bought and sold. This is a very easy way if you’re already setup to trade on the stock market, but it doesn’t protect your long term investment against fraudulent or secretive financial manoeuvres or even against Armageddon. The most popular and trusted ones are the SPDR Gold trust and the iShares Comex gold trust.

Investing your money in gold is probably the farthest you can get from a “get rich quick scheme.” It is a vehicle that can bring you money through a long period of time very safely, which is particularly effective in periods when the economy is not doing so great. Also, personally, I really like the idea of being able to touch my investment with my own hands. But that is just me.

 Chuck