Gold is a misunderstood investment.
Some view gold as eternally safe (when it is anything but); some see it as a glamorous means to short-term gains; and some misunderstand the market entirely in terms of how, exactly, it moves in correlation (or not) with or against other asset classes.
Let’s set some of these misunderstandings straight, shall we?
Here are a few of the things that typically appeal to seasoned investors who tap into gold.
For starters, many investors look to gold as an appealing opportunity to diversify a portfolio. While day traders and those who move quickly in the stock market shoot for quick and significant financial gains, strategic investors use gold because they know there will be perpetual demand. Also, while the stock market drops, there’s a better-than-good chance that gold won’t move down with it.
We mentioned in a 2013 article on Top Ten Investment Options inside an IRA that gold actually fluctuates a great deal more than most people give it credit for. However, as a long-term hold that only takes up a small portion of a portfolio, it has real diversification appeal.
Physical vs. Paper
The actual method of buying gold bars appeals to many investors. Where buying and selling stocks can feel almost like placing bets and provides little in the way of tangible satisfaction or reassurance, gold investment—even online—is a more physical practice whereby an investor actually takes ownership of real gold bullion instead of paper representing fractional ownership of a company (or a loan to a corporation or government entity), whether or not he or she actually holds it. Some like their gold in hand, while others prefer it stored offsite. Your preference will depend on your goals. Bullion Vault reports that they manage of $2 billion in investor precious metal deposits, and they offer investors the option of having their gold sent to them or having it placed in any number of secure vaults.
It has nothing to do with investing as a practice, but I can understand that some investors find something exciting, private, and personal about metals when compared to everyday stocks. (I’m not suggesting that y people should flock to gold buying sites simply for the thrill of it; but you can’t deny the appeal as a small piece of a portfolio). Plus, there’s a value to its simplicity. Buying and selling online is about as simple as it gets in investing, and learning about security and fair pricing make for a satisfying investment experience.
Perhaps the biggest reason that some choose to invest in gold, however, is that the price depends on a number of factors that many view as different than the methods you use to evaluate stocks. It doesn’t mean it’s more fairly valued (sometimes gold will swing in ways that analysts have trouble predicting), but here’s what I like: with gold I’m not worried about my Apple investment when smartphone sales that might drop off if an issue arises, such as when the initial roll-out of iPhone 6 devices led to them bending in people’s pockets; or concerned that my TESLA investment tanks when a few of the company’s cars make headlines by bursting into flames. Factors like these can impact just about any kind of investment, but seldom will such a sudden shift occur in the gold market.
If you’ve listened to the Stacking Benjamins podcast, you know about Len Penzo’s love of all things metal. Investopedia (where Greg McFarlane writes) listed eight reasons to own gold, and while the article takes an exclusively positive stance that’s no longer appropriate in the current market, it does make several points about the largest factors influencing why seasoned investors buy gold…..chief among them being geopolitical uncertainty and increasing demand. Financial and political difficulties in influential countries tend to lead investors to gold as a “safe-haven,” and there will always be a limited supply and high demand for the metal. Because people perceive these factors as being relatively constant, gold can be an appealing long-term investment.
We know that situations can change quickly in the world of international events, and much of this logic was turned on its head in the past two years, as gold experienced its most dramatic drop-off in price in recent history. In large part, it was the strengthening of the U.S. economy and the dollar that served as the cause, and the debate continues as to whether or not gold will recover and stabilize over the course of 2015. But regardless of the current market, the factors and concepts listed above are what tend to drive investors to consideration of gold, and some of those factors will make gold endure as a good diversifier in many investor portfolios.
Do you use gold in your portfolio? If so, how? If not, why do you avoid it?