Curious about gold? 5 things every potential investor should know in 2021
It's a controversial investment yet many seasoned investors swear by gold as a must-have in any diverse portfolio.
Gold is arguably one of the most interesting commodities anyone can buy. It's remained relevant and valuable for thousands of years, but it's attracted its fair share of critics, too.
Some claim gold has little intrinsic value (although this is hotly debated) and it doesn't deliver dividends, so you're only going to see a return when you sell.
Despite this, gold continues to shine – particularly in turbulent times. Interest in the commodity spiked during 2020 and prices hit all-time highs as the world endured prolonged instability.
So now, as markets begin to recover and gold experiences some dips, many potential investors are taking a closer look at gold. If you're among them, here are a few things you should know.
Gold is a diversifier
Every investor quickly learns that diversification is crucial to long-term success. Gold is one of the most effective diversifiers out there.
That's because gold has a very low or even negative correlation to most other investment assets. Usually, when shares are falling, gold is rising.
"This is a rare quality for an asset and it means that gold has the ability to reduce the risk of a portfolio," explains investment expert and Stockspot CEO Chris Brycki.
"Essentially, gold helps to improve the quality of your investment portfolio returns which means you can earn returns with less risk."
It's an effective insurance policy
Thanks to its diversification qualities, gold is widely considered as a strong insurance policy. Simply put, if your other investments aren't going well, you'll have gold to save the day.
Last year, the market experienced a level of volatility that hasn't been seen in decades. Predictably, the price of gold climbed as investors flocked to defensive assets.
In fact, gold hit an all-time high of US$2,058.40 per ounce. But gold doesn't just retain its value amidst financial uncertainty, but also geopolitical uncertainty.
For example, rumours of war and government conflict have positively impacted the price of gold in the past. Data shows upwards trends in response to many threats, including the Gulf War, the 9/11 attacks, and US tensions with North Korea.
It holds its value
"Paper money eventually returns to its intrinsic value: zero" – that's a quote credited to Voltaire which, at over 300 years old, still has a ring of truth.
Just look at the US dollar. Since 1913, when the Federal Reserve was created, the currency's buying power has almost completely diminished, losing over 95% of its value.
Gold, on the other hand, has been used as currency for thousands of years and still holds value.
"Roman records show that a soldier in Caesar's time could buy a tunic, robe and sandals for an ounce of gold," says financial advisor and CFO of Boston Trading Company, Jeremy Britton.
"Thousands of years later, in 1900, a man could buy a suit and a pair of shoes for an ounce of gold, or $10. In the 21st century, $10 will barely buy socks or a tie, but an ounce of gold can still buy a full outfit."
It doesn't pay dividends
Of course, despite its benefits, there are some drawbacks: namely, gold doesn't pay dividends. However, it can deliver impressive capital gains.
In 2020, the average closing price of gold was US$1,773.73. Compare that to 20 years previously, when the average closing price was US$279.29, and it's clear there aren't too many stocks that will have performed as well.
You (sometimes) have to store it
Another common complaint about investing in gold is that, since it's a physical asset, storage, insurance and security costs also have to be taken into account. But there are other ways to tap into the value of gold which don't require these additional costs.
For example, you can invest in exchange traded funds (ETFs) which I mentioned earlier, or you can trade gold on the financial markets via contracts for difference (CFDs).
When you trade gold on CFDs, you don't actually own any physical gold. Instead, you're trading contracts that are tied to the price of gold.
CFDs also let traders take larger positions than they would otherwise be able to afford, which in turn allows them to profit more heavily from smaller lifts in market prices. For example, broker platform City Index lets members trade with margins of 5% on gold, which means you only need to deposit 5% of the amount you want to stake.
Of course, that goes hand in hand with extra risk. CFDs are notoriously risky products and should only be used by experienced traders.
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