Gold has always been a traditional favorite with investors and savers alike, who turn to the precious metal as a safe haven in times of economic turmoil and stock market slumps. It was for these same reasons that gold saw a surge in interest during the early part of the coronavirus crisis, as investors scouted for an asset in which they could safely park their money.
Gold’s acceptability as a store of value and a hedge against inflation, are characteristics that influence the commodity’s role as a counterweight against traditional stock market investments. Actions taken by the Fed to provide stimulus to the economy raise fears of inflation and sees investors scurrying towards the yellow metal for safety.
How is Gold a Useful Diversifier?
Time and again, gold has proven its credentials in terms of liquidity, returns, and its role as a counterbalance, making it a compelling diversifier as an investment. All these qualities have made investors rely on it throughout human history, especially in times of uncertainty. Let us briefly look at some of gold’s special qualities:
Although gold does not always outperform stocks in terms of return on investment, it does fare better than them over particular stretches of time.
It may not readily generate cash flow, but specific types of gold-based assets are relatively easy to convert into cash.
Mostly, gold performance is at variance with stocks and bonds. When the stocks rise, gold may fall, or vice versa.
Additionally, there are other potential advantages of gold, such as:
Because of gold’s low correlation to other asset classes, it is a useful investment tool that helps spread the risk and diversify portfolios.
Gold is a defensive investment, with investors falling back on it at the slightest perception of peril to the economy.
The most opportune time for investment in an asset is when it is going through a lean phase in its demand cycle. Buying when negative sentiment is exerting downward pressure on the asset, making it relatively inexpensive, provides significant potential for a steep upswing when the sentiment turns bullish in its favor.
Gold, though it has many other qualities that attract investors, has not always been a good investment purely in terms of return on investment. Historical data of long-term returns reveals that between 1971 and 2019, the average rate of annual returns on gold at 10.61 percent only slightly trailed the annual returns on commodities with 10.69 percent.
Having said that, the period of time that we are looking at, while comparing data is very important in analyzing the true worth of gold as an investment. For example, while gold has underperformed by more than half, as compared to the S&P 500 between 2016 and 2021, it provided roughly 8 times the rate of return of the same S&P 500 index over a ten-year period from 2002 to 2012.
Mostly, stocks outperform gold over the longer term, by about 3-to-1, but gold may win out over a shorter stretch of time.
Purchasing gold in its physical form of coins or bars may be more satisfying to some, given the fact that you can look at them and touch them. However, physical ownership, besides providing emotional satisfaction, has its drawbacks in the need to insure and safeguard the valuable asset.
As for the profit on investment, owners of gold bullion and coins are totally dependent only on the rise in the prices, as storing physical gold does not provide an income stream like stocks or funds that pay dividends. In fact, you may incur additional expenses to store and protect your physical gold holdings.
There are several ways to purchase gold bullion and coins. You can buy online through dealers like JM Bullion or APMEX, or locally through a dealer, collector, or even a pawn shop. Noting the bullion spot price while purchasing can help you strike a fair deal. Transactions in bars instead of coins can help you save the extra price you might pay for a coin’s collector value.
Government mints guarantee the purity of newly minted coins that they produce. These coins come in multiple sizes, for both small and large investors. Some of the popular coins are the American Eagle, British Sovereign, Canadian Maple Leaf, Australian Kangaroo, South African Krugerrand, and US Mint 24K Gold Buffalo.
While gold bars start at 1 gram, heavier bars are suitable for large investors as they save on the add-on production costs, and can be stored in an insured facility. The downside is that these bars can be more difficult to sell or to use as barter. Many government mints and private companies like JM Bullion, All Engelhard, Sunshine Minting, and Valcambi Suisse, produce gold bars.
Gold IRAs have gained significant popularity since the financial crisis of 2008. Record-breaking sales of the precious metal, along with the proliferation of several new companies have helped simplify investing in a gold IRA.
Possible inflationary effects of the Fed’s strong stimulus packages and a sharp rise in the perceived geopolitical risks have also contributed substantially to the strong enthusiasm in gold IRAs.
Because gold prices typically follow the opposite direction of stocks and bonds, the addition of a gold IRA to a retirement investment portfolio acts as a hedge against inflation. The diversification of the portfolio smooths out long-term risk, making the gold IRA an intelligent option for retirement investments.
Gold IRAs may be either Roth or traditional, with investments only in physical gold, be it bullion or coins. So, the first decision you must make is if you want a physical investment instead of a mutual fund, an exchange-traded fund, or a gold-company stock, in your portfolio.
To invest IRA funds in gold, you need to create a self-directed IRA managed directly by you, with permission to invest in a wider range of products as compared to other IRAs. For a gold IRA, you must appoint a broker who will purchase the gold and also a custodian who will set up and supervise the account.
Custodians are usually federal or state approved banks, credit unions, trust companies, or brokerage firms. While these custodians dispense asset custody services to investors, it is usually the investor’s responsibility to select metals dealers.
However, well-established custodians sometimes share the list of dealers they know, with their clients. Conversely, metal dealers may make recommendations regarding IRA custodians. Ultimately, the choice lies with the investor.
While some IRA companies may provide a buy-back guarantee at wholesale rates, an investor could still end up losing money when they close the account. This does not usually happen when opening and closing traditional IRA accounts.
With an existing regular or Roth IRA or 401(k), you can opt to roll over a part or all of the funds into a gold IRA. The process you follow for the rollover is like you would for any retirement fund.
You must fill out an online or regular account application, and subsequently, it takes between 24 to 48 hours to establish an account.
A gold IRA can help you bring significant stability and balance to your investment portfolio. It may prove to be the key in delivering outsized returns and protecting your wealth in times of extended economic uncertainty. We recommend below, a few best-value and reliable IRAs:
If you are thinking of investing in a gold IRA, it is best to seek guidance from an accomplished financial advisor who can help you determine the right mix of investment options for your retirement portfolio.