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Gold The Safe Haven Of Choice

Publilius Syrus, a Latin writer in the Roman Empire, famously said, “When gold argues the cause, words are not required.” More than two millennia have passed since then, but the statement rings true even today and the world’s trust in the yellow metal remains the same, especially when the times are uncertain as they are now with all this paper money printing activity.

There are records of treasures consisting of gold as early as 4000BC, confirming the relevance of this precious metal to wealth and power for many millennia. Minting of gold coins and their use as currency goes as far back as 550BC. But even before its use as currency, gold was long known as a sign of wealth.

As an investment, gold existed in the form of a traded asset much before stocks and bonds. Investing and trading in gold, in its physical form or derivatives, offer lots of opportunities in the preservation of wealth for the investor.

Gold in Times of Economic Uncertainty

The COVID-19 pandemic since last year, and the ensuing worldwide crisis, has seen the price of gold hitting historic highs, breaking all past records. This innate ability of gold to act as a safe haven with its price rising during periods of uncertainty makes it a safe bet when stocks and other conventional investments suffer heavy losses.

Precious metals imported by the U.S. last year were the highest in the last two decades, while at the same time, all other imports showed a decline due to the pandemic-induced recession. People were worried as the stock markets also fell and they opted to park their capital in a safe haven asset to protect their investments.

Many investors trust gold for its wealth preservation qualities. Read on to find out why you should invest in gold, and how it can protect your wealth in these uncertain times.

What Is the Difference Between A Safe Asset and A Safe Haven?

While a safe asset, such as bonds, provides an assured return, a safe haven asset is one that is able to maintain its value during economic crises and in uncertain times.

When you buy a government bond you are lending money to the government while the government promises to repay the money to you with interest, at a fixed time in the future. Prices of safe assets remain comparatively stable as they are assets that earn a fixed income.

On the other hand, the value of a safe haven asset is prone to fluctuations, rising and falling in tandem with the increasing or diminishing uncertainties. This fluctuation is visible if we look back at the prices of gold in the aftermath of the 2008 financial meltdown and in the current crisis brought on by the COVID-19 or Wuhan virus pandemic.

There are exceptions in the form of a price fall when gold deviates from its conventional role as a safe haven. These exceptions are due to the uncertainty that grips investors during a stock market crash, with bullion owners selling their assets of the precious yellow metal to prop up cash flow or cover losses.

What Makes Gold A Safe Haven?

Ever since ancient times, people have considered gold as a store of value. Its aesthetic appeal and virtually indestructible nature have been helpful in placing gold in this exalted position as an asset. Almost all the gold that has been mined or found till now is in circulation even now. Gold’s rarity and malleability also work to its advantage, making it easy to make coins or jewelry because of its low melting point.

All these features combined to help gold being the basis for circulated currency and play a formal role when the gold standard was in place. Even now, there are huge reserves of gold with central banks around the world.

According to the World Gold Council, out of the nearly 200,000 tons of mined gold till now, 21.6% is with private investors, around 47% circulates as jewelry, 14.2% finds use in other applications like electronics, and 17.2% is with central banks and governments.

Understanding and Anticipating Economic Crises

While economies continue to grow, there are pitfalls to the endeavor of striving to expand constantly. To put it in simpler terms, we risk an economic crisis whenever there is realignment as we pass from a period of expansion into a recession.

Typically, economic crises are directly related to business cycles. An increase in the unemployment rate and a sharp drop in GDP usually occurs with an economic downturn. This in turn leads to panic amongst the investors.

Economic crises can be in the form of a currency crisis, GDP crisis, bank crisis, or a broader financial crisis brought on by external non-economic factors. The latter, like the economic crisis resulting from last year’s pandemic, has the potential to severely affect the whole economy and start a chain reaction that spurs other crises.

In the present scenario, there is the possibility of past trade tensions with China and the EU rearing their ugly heads again. The EU levied taxes worth billions following the US subsidies to Boeing, and there seem to be no plans by the new administration to roll back tariffs on Chinese exports imposed in 2018 because they know that tariffs work and have been working.  

Understanding the Role of Gold in an Economic Crisis

Gold has a negative correlation to stocks and a positive correlation to inflation. It is a universally upheld belief that gold rallies in value during an economic crisis. So, while there is turmoil in the markets and crises in the economies, gold has the propensity to shine and thrive.

The past couple of years have seen continuous printing of currency by central banks to mitigate the effects of recession due to the ongoing pandemic. This in turn has driven up gold prices on the back of inflationary concerns. There are further cuts in the interest rate and quantitative easing (QE) programs, in the offing. More rate cuts and stimulus packages can drive the yellow metal to record highs.

We can see that central banks are determined to follow the ongoing monetary policy, abandoning inflation markers to keep printing currency. This ultra-loose policy exerts a downward pressure on the US dollar while proving to be a boon for the yellow metal prices.

If we go back a decade to the financial market meltdown in 2009, gold initially depreciated because investors needed to raise cash by liquidating their gold positions, as in previous economic crises. However, subsequently, gold behaved exceptionally by rallying until 2011 even though the recession ended in 2009.

Gold as an Investment

Although gold has a long history as a store of value and a financial asset, it started gaining its present place of eminence in contemporary finance only after the late 1800s. This was the time when almost all the nations started adopting the gold standard, fixing their currency values to gold’s price.

Many countries kept on dropping and readopting the gold standard until 1971 when they ultimately replaced it with free-floating currencies. Not until the financial crisis in 2008 did the price of gold start its upward climb again. Experts attribute the reason for this spike to the central banks’ ratification of quantitative easing (QE).

General economic wisdom suggests that QE causes inflation, and, since the prices of yellow metal rise with inflation, adoption of QE leads to an appreciation in the value of gold. Here are some of the more pertinent reasons to invest in gold to protect and preserve your wealth:

Hedge

Typically, gold holds its value or appreciates with a depreciating dollar and rise in inflation. This makes it a good hedging asset for investors looking to cut their losses.

Safe Haven

Gold is a scarce, stable asset that provides insurance against economic downturns and uncertainties. Interest rate fluctuations and decisions to control supply by printing impact currencies have no direct effect on gold, making it a safe haven for investors. 

Portfolio Diversification

It is necessary for a balanced and diverse portfolio to include assets like gold as a countermeasure to the stock market. This helps in mitigating risk and reducing volatility for investors.

Golds Stock Dividends

Although gold stocks usually reflect the price movements of the metal itself, gold stocks can prove to be profitable even at the low prices of gold. In addition, the high dividend payouts by mining companies can act as a further incentive for investors to buy gold stocks.

Investments in Gold Using Gold IRAs

Regular IRAs (individual retirement account) restrict your investments to the usual asset class of stocks, bonds, and cash. A gold IRA, on the other hand, allows you to invest in physical gold, platinum, silver, and palladium.

The Growing Appeal of Gold IRAs

Gold IRAs are an intelligent option for retirement investors looking for a balanced and diversified portfolio. The addition of a gold IRA to your retirement portfolio acts as an insurance policy countering inflation, as prices of gold travel in the opposite direction of other paper assets. This approach balances the portfolio and minimizes risk over the long term.

The popularity of gold IRAs has soared since the 2008 financial crisis and the worldwide recession that followed it. Investments in gold IRAs have witnessed phenomenal growth resulting in the proliferation of many companies, simplifying the transactions, and ensuring a robust gold IRA environment.

The inflationary impact of stimulus packages by the Federal Reserve has also generated a huge interest in gold IRAs. You need to find a custodian and an approved depository for the IRA. Once you buy the gold or any other precious metal, you must transfer it to the depository for the custodian to be able to account for it.

Finding a Custodian for a Gold IRA

To invest in gold, you must form a self-directed IRA that you can manage directly, and that also allows you to invest in a wider portfolio of investment products as compared to other IRAs. In a gold IRA, you must have a broker and a custodian to purchase the gold and to manage the account, respectively.

Usually, banks, brokerage firms, trust companies, or credit unions act as custodians.  They need approval by government agencies to be able to administer custody services to investors and advisors. Selecting a metal or bullion dealer is the responsibility of the investor.

However, traditional custodians having connections with metal dealers may share the list. Conversely, some metal dealers may provide references for an IRA custodian to an investor. But as a consumer and investor, you are at liberty to look for custodians on your own.

Gold IRA Rollover

You can exercise the option to roll over all or some of your existing traditional IRA or 401(k) funds into a gold IRA. The entire process for rollover is no different than other retirement funds. You need to fill an online or paper application to set up an account that usually becomes operational within a day or two of completing the application process.

How to Select a Gold IRA Broker?

Given below are some important yardsticks to consider in the selection of a broker for a gold IRA:

Transparency

There must be clarity and unambiguity about all your upfront costs so that there are no surprises involving hidden charges or fees after you invest.

Record of Accomplishment

Going through customer reviews or the complaints filed against the company may be helpful in forming an opinion. Try to look for a company with an exceptional reputation and track record. 

Adaptability

Understand your needs and goals as an investor and choose a company that can cater to them accordingly.

Eligibility

Ask for and review licenses, insurance, and registrations of the company before deciding to appoint them as your broker. 

 

Market Outlook for 2021

The utility of gold as a hedge to the stock market has been thoroughly reinforced since the start of the coronavirus pandemic. While gold has broken all previous records since 2012, some analysts predict further gains, looking at the uncertainties still surrounding the pandemic that may not even end as it should for political reasons.

In the event of continuing financial uncertainty due to the recessionary influence of the coronavirus pandemic, gold may hit new highs this year.

Our Recommended List

A gold IRA is all about flexibility and the freedom to use your retirement funds wisely to invest in gold. To help you get rid of the overblown markups and unlock the best value possible, here is our list of recommended gold IRA brokerages:

  1. Goldco
  2. Birch Gold
  3. Augusta Precious Metals
  4. Regal Assets
  5. Noble Gold

The Bottom Line

In common investment parlance, gold IRAs are alternative investments that do not trade on a public exchange and need the expertise to value. Depending on the size of your investment, it may make sense to identify and retain a competent financial advisor who can help you determine how gold can be an excellent fit for your portfolio.  

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