Investing in Gold: Pros & Cons
By: Maxime Rieman
Should you invest in gold? Whenever the economy starts slipping, the talk of investing in gold always heats up. But is investing in gold really worth it? Whether or not an investment in gold is worth it to you depends on your own financial situation and what your goals are for investing. This article discusses the pros and cons of investing in gold, including an analysis of supply and demand, market stability, and return on investment.
For most people, the primary benefit to investing in gold is having access to a tangible form of wealth. Gold is a universally recognized form of money and it has value that is independent of the stock markets or government mints. An investment in gold is a way to declare a personal, financial independence from the system, if only in a small way.
The value of gold is mostly stable. If its value decreases, it is only marginally, which is one reason it is a popular investment choice. Another reason that its value is relatively stable is because it is mostly inflation-resistant. While the value of money can change drastically during periods of inflation, gold tends to go unaffected, which makes it a good investment.
Supply and demand, of course, play a role in gold’s value as well. Gold has an ongoing demand, both from private and industrial sectors. Some estimates put industry at about 10% of the demand for gold because gold is used to make various electronics and other goods. The biggest demand comes from jewelers who find that gold continues to reign as a popular choice in jewelry. Fortunately for people who invest in gold, while the demand stays constant, the supply is slowly dwindling. This means that people who invest in gold can benefit from the economics of supply and demand.
One of the biggest disadvantages of investing in gold is that your stockpile is more easily thieved than investments in the stock market, for example. However, some people who invest in gold may choose to invest in the stock market via something like an exchange-traded fund for gold. This would remove the risk of being robbed of one’s physical goods.
Unlike with paper money, gold cannot actually be used to buy things. The utility of gold investments is predicated on the fact that the gold could be later sold, pawned, or possibly bartered. Of course, in the case of bartering, the gold will only be worth what your trade partner perceives it as being worth, so an investment in gold may not be that beneficial in some sort of post-global economy barter society.
Although the value of gold is generally stable, it is subject to change based on a few factors. First, the policies set by the United States Federal Reserve can affect its value. The US economy, as well as the global economy, can also affect the value of gold. Gold prices can also be disrupted by futures trading.
Gold, unlike other investments, does not offer any dividends. The interest rate on gold ranges from extremely low to non-existent, so gold investments will not yield ongoing income in the same way that stocks or even a savings account would. If you are looking for an investment whose dividends you can live off, gold is not it.
Ultimately, the decision of whether or not to invest in gold depends on your personal finances and your financial goals. Although gold may not yield additional income and may be at greater risk for theft, an investment in gold is fairly stable and relatively isolated from the vagaries of inflation and other economic factors.
Maxime Rieman is a writer for NerdWallet. When she’s not tinkering with the car insurance calculator, you can find her giving investing tips and budgeting help.
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