Investing in Gold (and Silver)

Gold has long been viewed an item of value - a precious metal. From very early on, even in the times of Moses in the Bible, it was used as barter for the trade of goods, measured by weight to determine value. Gold's uses extend past just monetary exchange - it is used to make a variety of jewellery pieces as well as religious and cultural artefacts. Gold symbolises riches.

Gold coins date back to around 550Bc in ancient Turkey, they were stamped specifically to determine value and used as formal currency to standardise trade. In 1792 gold standard was introduced in America where the value of the dollar was backed by the value of gold deposited in the banks but was de-pegged 179 years later by President Nixon.

The value of gold has grown approximately 500% since this date in 1971 and today, has a market capitalisation of about $10 trillion. It is deemed a good hedge against inflation with an average yearly return of 10.6% in the last 50 years. It has and continues to perform as a good store of value through economic upturns and downturns, holding or slightly appreciating in real value when adjusted for inflation (similarly with silver). It is important to note though that gold often does not grow wealth, it maintains it.

The valuations of gold and silver are (generally) independent of stock market activity and geopolitical news and thus, during high inflationary times when investors are scared, they opt to shift their investments into these safer bets to avoid large capitulations. Gold has been consistent over such a long period of time and is classed as a good asset to provide diversification in a portfolio. There is also high liquidity in the markets and there are certain associated tax advantages.

Gold preserves wealth in a way that fiat currencies do not. Whilst gold appreciates over time, fiat shows a negative correlation with inflation, it devalues as time passes. Over generations this difference is stark.

E.g. if, in 1991, you had a choice of investing $20 in gold or holding onto the note (which in that time, would afford you a fashionable outfit), in todays prices, that gold would be worth approximately $100 dollars and would buy a similar outfit whilst that $20 note would just about get you a McDonalds meal. The gold held its purchasing power whilst the note was devalued.

Different Ways

The global gold price is set in the UK by the London Bullion Market Association (LBMA). This affects the rate at which you can attain your gold. There are both physical and non physical means of investing in gold, each having their respective pros and cons.

Physical:

Physical gold is valued in carats, with higher carat numbers representing a higher proportion of gold and lower proportion of other metals. 24 carats is pure 100% gold.

Physical gold can be bought  from the royal mint or from the official government website in your country. It can also be picked up on the high street from trusted dealers. The most common physical gold forms are as follows:

• Golden Bullion Bars: these are melted gold that are formed by moulds into bars. They vary in size and are stamped with their weight and purity levels.
• Gold Coins: The most prevalent coins minted coins are the Britannia and Sovereign. They vary by size and have different values. They are official legal tender in the UK and are exempt from capital gains tax and VAT for UK residents.
• Gold jewellery: these pieces hold value but their costs also include the cost of labour as well as retail margins which can be more than the actual underlying value of gold - it is important to check the carat of gold

Non-physical:

Non physical ways of holding gold are also viable investments. These include:

• Gold Mining Companies: indirect investment in gold. Here you buy shares of the companies that mine, refine and trade the gold. Their stock prices correlate to the gold prices as when gold appreciates, they make a greater profit.
• Gold Funds & ETF's: funds are professional investment firms that pool together money from many investors and actively or passively make investments on their behalf. ETF's directly track the price of gold. They often actually hold gold, or are invested in some sort of futures contract.
• Forex Markets: not really an investment but gold can be traded on the Forex markets to produce a profit.

Cons

As gold is a finite commodity, supply is limited, meaning its price is highly sensitive to changes in demand. Consequently, in the short term, there are fluctuations in value of gold holdings. Just as any investment, there is also no guarantee that its value will raise.

Gold is very heavy, making it inconvenient to handle and store. The metal also needs to be held are certain temperatures. The best place to keep gold is in a security deposit box in a bank which is not cheap -  this will absorb some of the real realised profit!

Gold is not a cash producing asset meaning no dividends or interest are paid.

Gold vs Other Investment Opportunities

Gold as an investment is frowned upon by many as it does not hold a true propensity to yield a return. It is viewed as just a store of value. The opportunity cost associated with investing in gold is huge as many other routes propose far greater and much quicker returns.

For the wealthy who are more risk averse, this is suitable are they would like to maintain their wealth and have much more to lose, whereas investors in pursuit of  building wealth require an elevated tolerance for risk.

Investments such as real estate, stocks, bonds and cryptocurrencies yield 10,20,50x greater returns but have larger risks associated with them.

If you're wealthy, it's simple, just Godl