Gold’s shiny yellow nuggets have been an essential part of human culture since the beginning of recorded history. Around 3100 B.C., the first Egyptian dynasty regarded this precious metal as the highest medium of exchange. The gold standard served as the global basis of money until 1971.
It’s no longer the primary currency, but gold can be a solid investment for many reasons. Here’s what you need to know if you’ve ever considered investing in the world’s most precious metal.
Is Investing in Gold Risky?
Gold and risk definitely belong in the same sentence. Simply put, the answer to “Is gold risky?” is a conditional yes. You must consider the degree of risk and how you can control it. As a lone investment, gold is very susceptible to the whims of supply and demand. Its price can be very volatile, especially during upswings in the stock market. It’s easy to conclude that investing in gold is a risky business.
On the other hand, gold prices tend to rise when other securities decline. This makes it an attractive asset if you’re after a diversified investment strategy. Plus, it provides protection against a weak U.S. dollar. To learn more about this, read about how to invest in gold.
Where to Invest in Gold
You can invest in gold in many forms. Dealers offer it in the form of coins, bullion and jewelry. Physical gold involves its own hassles — particularly storing it and insuring it. You can use the more convenient means of using an online brokers to purchase:
Although traditional brokers still exist, many of the best investment firms operate online. More and more people are using online brokerages for easy access to top-level, inexpensive investments. They generally have low fees and no minimum balances. Plus, online brokers offer research tools, analysis tools and educational material. The best way to invest is to know what you’re doing. Here’s a rundown of some of the best gold brokers online.
The TradeStation investment platform attracts active traders. If you don’t trade at least 5,000 shares a month, you’ll have to pay a hefty $99.95 monthly fee. Plus, you must have some technical prowess. TradeStation offers you over 40 years of historical data for testing your gold investment strategy.
TradeStation’s Market Insights blog provides timely updates on the events affecting gold prices and the securities tied to gold. It particularly supplies news and updates on the gold ETF market.
2. TD Ameritrade
StockBrokers.com ranks TD Ameritrade as the top overall broker of 2020. This is mainly due to its user-friendly platforms, extensive market research material, superior education for beginners and $0 trades. Thinkorswim is a great mobile application for gold investors. It’s great for charting indexes that directly affect gold ETFs and gold stocks.
TD Ameritrade enhances your research capabilities with its streaming financial network, real-time social media feeds and daily market commentary. Except for penny stocks, all stock and ETF trades are free. TD Ameritrade provides beginners with courses, webinars, videos and many other educational tools.
Like TD Ameritrade, E*TRADE offers $0 trades for all stocks and ETFs. StockBroker.com ranks it #1 in the fields of mobile trading and options trading. E*TRADE also ranks among the top 5 in research and education.
Its risk tolerance tool can help you determine how much gold you should have in your portfolio. Beginners generally have an easy time using the platforms. E*TRADE targets active investors with over $100,000 in tradable assets.
Along with offering free trades of stocks, Firstade distinguishes itself by offering $0 options trading. This online broker rates high for its trading platform, research and account opening. It gets a passing grade in education, customer service and product selection.
Firstrade’s 3 major flaws are the U.S.-only trade restriction, the lack of 24/7 customer support and the limited money transfer system. The U.S.- only trade restriction should not be a problem for you to purchase outside the U.S. It offers ETFs that track markets in various areas and countries. They claim it’s an ideal way to invest in gold abroad.
5. Charles Schwab
Charles Schwab puts a premium on customer service. It joins other online brokers by slashing its stock trading price to $0. This includes ETFs and options. Its lower profit margin doesn’t deter Charles Schwab from making customer satisfaction a priority.
To support this goal, the broker offers a refund on all services to any unsatisfied customer. Plus, its analysis, education and research tools rival many of the top online brokers. Its investment tool, Expert Fund Pick, helps you narrow your search for the right gold ETF.
Advantages of Gold Investments
Throughout centuries of change, gold continues to be a popular investment. Here are some reasons why you should consider investing in gold:
- Hedge against inflation: Inflation happens when the rise in prices on the cost of living decreases the dollar’s buying power. Any weakening of the dollar increases the price of gold. During hard times due to inflation, gold becomes a more sound investment than cash.
- Diversification: Risk management is essential in developing a strong investment portfolio. Wise investors add securities with a negative correlation to their portfolios. Securities with a high negative correlation move in completely opposite directions. With its negative correlation to the stock market and currency values, gold provides a vital way to lower your overall investment risk.
- Liquidity: Cash is king — but gold runs a close second. Owners of gold can easily convert it to cash all over the planet. Other than actual cash, it has no peers.
- Hard times insurance: Gold holds its value when financial hard times hit, including during geopolitical unrest. People tend to seek shelter when world powers collide. During these events, gold prices generally outperform other securities.
Disadvantages of Gold Investments
Before you decide to invest in gold, be aware of its flaws and shortcomings. These factors can come in handy when determining the ratio of gold to other investments in your portfolio. Consider these disadvantages:
- High capital gains taxes: Most gold investments have a capital gains tax rate of 28%. This is much higher than the normal rate of 15%. The IRS considers gold a collectible. Without considering the tax burden, this factor could make your investment portfolio look more profitable than it really is.
- No passive income: Gold’s only return occurs when the price rises and you decide to sell. It doesn’t generate any passive income through interest or dividends.
- Beware of the bubble: Hard economic times cause many people to invest in gold. Panicking investors can cause gold prices to soar to the point of being overpriced. Once the price corrects itself, you can lose a lot of value.
- Dismal historical returns: Gold returns historically lag behind stocks and bonds returns. Over 200 years, a stock investor would have earned 5.6 billion from a $10,000 investment in gold. A bond investor would have received 8 million for the same investment. A gold investor would only have earned $26,000. As a standalone investment, gold can be a terrible performer.
Choose Gold to Complement Your Portfolio
Investing in gold is risky but the risks are manageable. Gold can help you manage the overall risks in your portfolio. This is the double-edged sword. As a sole investment, it offers low long-term returns and possible losses. It can be a vital asset to your investment strategy when used correctly.
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