Gold has fascinated humans practically since it exists. Since the most remote past it has been considered a precious metal, highly valued in the manufacture of jewelry and ornaments . On the other hand, it has served as a bargaining chip in itself and also as a raw material to mint and give value to different currencies throughout history.
Today we will see the main advantages and disadvantages of investing in gold today, knowing a little better the position of this raw material in an economic context.
Why invest in gold?
Gold is considered a safe haven value . This means that its price is highly stable, so in times of crisis it maintains most of its value and can even increase it. This is mainly due to two reasons: on the one hand, it is due to the consideration of gold as a precious metal ; on the other, gold is a rare commodity and its existence on the planet is finite.
These characteristics have made gold one of the most used goods to accumulate wealth, in order to have a security fund to face crisis or economic emergency situations. So much so, that until 1970 the main states of the world backed their monetary systems with the gold reserves stored in their central banks. As of 1971, gold was replaced for this purpose by the US dollar, as well as other safe-haven currencies.
To know if an investment in gold can be attractive for us, nothing better than to know the main advantages and disadvantages of this asset in order to form a well-founded valuation.
Advantages of investing in gold
It is a refuge value
As we have already mentioned, gold has always been considered a safe haven. This means that there will always be a certain degree of demand for gold, which guarantees a corresponding stability in its price. Also, if a state with some economic capacity decides to buy gold to increase its reserves, this can cause its price to rise globally. Not surprisingly, in 2017 gold rose 12%.
It is a finite good
The gold that can be extracted from the planet is limited. It can no longer be created artificially, as happens with the issuance of currency by states in times of crisis. This means that investment in gold is, to some extent, protected against inflation .
Increasing demand
The jewelry industry and the technology industry demand 70% of the gold bullion production worldwide. These are two sectors that are in good health and have sustained growth prospects in the coming years. Although there may be regions of the world where there are local crises, there will always be someone interested in investing in jewelry and technological development elsewhere on the globe, so demand from these sectors is expected to continue.
Gold is less conditioned by political instability than other types of goods and investment products
Gold is gold anywhere in the world, so it does not depend directly on the designs of a specific economic power or a company, as it could happen in the case of investment in currencies or other stock products.
Gold is a universal good
This implies that its liquidity is maximum: there will always be someone willing to buy. Although this does not mean that we are going to ensure a profitability at the time of sale.
It allows to diversify the investment
Being a security that offers a certain level of investment security, it can be a good complement to balance options that present more risk in our portfolio.
The sale of gold is exempt from paying VAT
As long as it is sell gold bullion with a purity of more than 99.5% or coins with a purity of more than 80%. Now, if we obtain an increase in equity derived from a gold sale, we must reflect it in our income tax return.
Disadvantages of investing in gold
Gold is a valued good
Gold is listed on the commodity market as a precious metal. This means that its price can go up, but it also means that it can go down. Although the price of gold tends to stay high, if we buy at one price and sell at a lower price, we will lose money. As in all investments in stock markets, investing in gold involves a risk, so the profitability of the operation is not assured .
Purchase or investment commissions
Whether we buy physical gold or if we decide to invest in gold through a financial product, we will have to face the profit margins with which advisors and suppliers work.
Pegged to the dollar
Gold is priced in dollars. This means that there is a correlation between the position of the dollar and that of gold in the markets: if the dollar goes down, gold goes up. The problem is that the opposite can also happen, so that the US economy directly influences the price of gold worldwide.
Profit margin on jewelry and coins
If we decide to buy physical gold as an investment, we can do so in the form of certified bullion, certified coins, or jewelry. The best option is the first of the three, since if we buy jewels or coins, the value of the gold used in the production will be added to the price of the manufacture and design of the jewel; or the numismatic value of the coin. In this way, we will get less gold for the same money than if we bought bullion directly.
The price of gold rises when interest rates are low
When the interest rates offered by some savings and investment products are low, investors tend to look to gold as a safe haven. However, this movement influences the price of gold, so we will buy it higher.
Intermediary companies
The mining companies specialized in gold mining can stop your activity to manipulate the supply of the metal , in order to increase their price. In the same way, if they decide to buy and invest in gold, they will increase production to buy it down.
Storage problem
The fact that gold concentrates a lot of value in a small space can also be a problem from a security point of view. In this case, the most sensible thing would be to keep our gold in a bank safe or at least take out insurance. This can cause us a series of maintenance costs for the investment.
Read also: What is better to invest in investment bullion or gold coins?
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