Gold Investing: A Primer
Hey all! Have been seeing a post on gold investing and thought it would be good to explore this topic together. Have put together a short guide to gold investing (internationally applicable).
Gold is historically valued as a stable medium of exchange for its glamour. Intrinsically, it has almost no value. Rather, it has value because it is trusted and recognised by people as a legitimate currency or asset.
As of end-2017, there is around 190,040 tonnes of gold in the world. Experts estimate that 54,000 metric tonnes of gold are left to be mined – about ~20 years of mining left.
Why invest in gold?
Often, the motivations for investing in gold are similar to other forms of investments: hedging against inflation (protecting wealth) and future gains (growing wealth).
That leads us to the next question: What are the returns like for gold? What about in comparison to index funds?
Source: BullionVault, in USD
Over long periods of time, the value of gold has risen (although barely in keeping with inflation).
Source: Longtermtrends, in USD
If you examine the trend for the 20-year period (from 2000 to 2019), your returns on investment with gold would be ~300% as compared to the Dow Jones (blue) and S&P 500 (red) ~100% returns.
The movement of gold prices seems to be more volatile than the two indexes as well.
However, if you push the timeline to the past 30-year period, the index funds would way outperform gold in their returns.
The bottom line is this: there is no fixed way to predict the returns of investment on gold. What we can say for sure is that yes, the price of gold has historically been shown to rise with inflation and it can function as a relatively good hedge against inflation. But the opportunity costs of parking your money in gold and gold-backed assets can be quite high depending on your investment horizon.
How to decide if I should invest in gold?
Gold is a highly volatile asset in the short run. You should not be investing in gold if you are looking for quick wins, a rule that applies for all other speculative assets.
Common wisdom also suggest that you should invest in gold if you suspect a major impending recession.
What drives the price of gold?
Like other speculative assets, the main driver in the value of gold is in how it is used. As long as retail investors and the rest of the world still trusts in the stability of gold’s price and as a common medium of exchange over the long term, then gold will still hold its value over time.
Principles of economics tell us that demand and supply factors ultimately determine the price of gold.
- Jewelry and Industrial Demand
- Future expectations of price of gold and economic outlook
- Production volumes
- What are the current technologies available and can they be further optimised to reduce costs of extraction?
- Discovery of new gold mines / depletion of current gold mines
What drives the price of gold?
How to invest in gold?
- Physical gold
The most well-supported option for those who wish to invest in gold for a substantial period of time. However, purchasing physical gold could be troublesome.
Gold Bullion: 99.5% pure gold in the form of bars or ingots – this is the most popular form of gold for investing.
- Gold funds: ETFs / Trusts
Mutual funds and ETFs (GLD, IAU) that professionally track the price of gold, they provide a fuss-free way of investing in gold. However, the returns may be lower than buying the gold directly yourself due to the fees incurred.
- Gold Derivatives (Futures / Contracts for Differences)
Futures are contracts that allow you buy or sell gold at a fixed price at a set point in the future.
This is the most speculative option. You can lose more than you invest if you try to short the prices of gold, as with any other asset.
Contribute your thoughts and let me know if there is anything I should add!
Do you think gold has intrinsic value? Or is it a purely speculative asset? (Inspired by @antoniomc27 comment)
Gold investing: Yay or Nay?
Disclaimer: Nothing in this article should be construed as, constitute, or form a recommendation, financial advice, or an offer from CrowdFund Talks. We are not to be held accountable for any losses on any investments made by readers. The content and materials made available are for informational purposes only.
vin2018 last edited by
Thanks for sharing this analysis on gold. Gold will remain a safe haven for investors and the biggest opportunity for Gold traders.
Here's a resource where I have shared analysis on gold investing in 2019 -