How to invest in gold
Gold is a precious metal that is used in everything from jewelry and artwork to industrial goods and accessories. It trades in coins and weighted bars, but it’s also possible to own certified paper that ensures a stake in gold held securely elsewhere.
From 1792 to 1900, the value of the U.S. dollar was backed by gold and silver reserves held in the Treasury. In 1900, this practice began to exclude silver, and simply became known as the Gold Standard, directly linking the dollar’s value to that of gold. Although the Gold Standard was abandoned in 1971, gold has held its value because it is not closely linked to most other investments, and also because it has historically retained its value during and after catastrophes. This is important because often during a crisis, stocks, bonds, and currencies often go down all at once in value. Yet during these times, the price of gold almost always increases. This characteristic often adds vital stability to investors’ portfolios.
Why gold is a popular investment
- Is limited in supply; unlike cash, the government cannot create more.
- Holds its value over time.
- Rises in price with inflation.
- Is a tangible asset that is extremely durable.
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Disadvantages of gold investments
Little in the way of tax benefits or income potential.
- Doesn’t earn interest. Therefore, investors cannot benefit from the benefits of compound interest.
- Storing it can be a security risk.
Like stock prices, gold values fluctuate. Gold often appreciates (increases) in value when stocks fall, and depreciates (decreases) when the stock market rebounds. To some extent, this is because investors often store money in gold while the stock market is stable and reallocate gold into stocks when a bull market is approaching. Because of this seesaw effect, many investors include gold in their portfolios to balance the risk of other investments, as well as to protect against downturns in the stock market.
If you invested $100 in 2004, ten years later it would have been worth:
- $313 in Gold
- $303 in Silver
- $245 in a Nasdaq Index Fund
- $199 in a S&P 500 Index Fund
- $158 in a Dow Jones Index Fund
Google vs. gold
In 2005, Google stock was trading at an equal value with gold. By the end of 2008, Google closed at $308 while gold was worth $866 an ounce.
It is possible to make an investment in gold without actually owning the metal itself through Commodity Trading. For those with an appetite for risk, it is also possible to borrow money and trade gold on credit in the marketplace.
- In Abu Dhabi, you can buy gold from a vending machine.
- Olympic gold medals awarded in 1912 were made entirely from gold. Now, an Olympic gold medal is made with only 1% gold.
- The world’s largest stockpile of gold can be found five stories underground inside the vaults of the New York Federal Reserve Bank. Twenty-five percent of the world’s gold reserves are there, although foreign governments own most of the 540,000 bars.
- Purity of gold is measured in a standard of weight called “Carats.” Carat weight can be 10, 12, 14, 18, 22 or 24. The higher the Carat number, the greater the purity of the gold. To be considered “solid gold” the minimum weight must be 10 carats.
- Pure gold is so soft that it can be molded by hand.