December 2018 was a tough month for the stock market. In fact, the S&P 500 started falling in October of 2018. An aging bull market, a trade war that could be long term, higher interest rates, and falling profits are all indicators that the long run up in stock prices is over. When a bear market is on the horizon, one of the options for an investor is to take profits from stocks and look for some practical gold investments. The key here is the word “practical.” There are inefficient and difficult ways to invest in gold and then there are practical gold investments. Here are some thoughts on why and then how to invest in gold.
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Why Invest in Gold?
A true “gold bug” believes that in the end all paper (fiat) currencies will become worthless and that gold will hold its value. These folks buy gold bullion with the intention of holding it forever. Others jump on the bandwagon when gold is going up in price, only to sell when the price of gold corrects. Why you would want to invest in gold can vary and depending on your reason there may be different practical gold investments for you.
Investopedia writes about 8 reasons to own gold. Here are their 8 reasons.
- Gold holds its purchasing power over the decades and centuries.
- When the dollar weakens gold bugs believe that process will continue and they buy gold.
- Gold is seen as a hedge against inflation.
- The purchasing power of gold also rises during periods of deflation such as the Great Depression.
- Gold is a refuge during periods of geopolitical crises.
- New gold supply is dependent on new mines dug deeper and deeper so there are supply concerns.
- Gold goes up when the stocks and the dollar go down so it is a way to hedge risk in stocks and cash positions.
- The combination of all the above factors makes gold a good (but limited) part of any investment portfolio.
Your reasons for buying gold will determine what to buy, how long to hold, and other factors. Thus practical gold investments for one investor will differ from the practical gold investments of another.
Practical Gold Investments
Let’s assume that you are a true “gold bug” and believe that the only thing that will hold its value over the decades and centuries is gold. You will probably want to buy gold bullion. Years ago we wrote about how to buy gold for investment. We wrote about buying gold bullion at that time. The issue with gold bullion is storing it in a secure place. If you periodically buy a few gold coins from the US mint, your bank safe deposit box will do just fine. If you are routinely buying 12.4 kilogram “Good Delivery” gold bars, you will quickly need more safety deposit boxes or will need to pay to have your gold stored in a secure vault. If you want to sell any of your gold you will need to have it removed from storage and shipped to the buyer. This is an extra cost.
And, while your gold is sitting there during a stock market rally, it is not appreciating in value or gaining interest. Gold bullion is an ultimate hedge against societal and economic collapse but is commonly not a good investment. We wrote that you might want to avoid gold as an investment back in 2012 when the price was peaking. In that article we noted the increase in gold prices in the 1970s and the fall of gold prices in the early 1980s. It might be noted that while the price of gold was $1,700 an ounce when we wrote that article, it is $1,290 today! Folks who sold their gold in 2012 and bought an S&P 500 index fund did just fine, thank you very much.
Flexible and Practical Gold Investments
The best time to buy gold is when nobody else wants the shiny stuff and the best time to sell is when the whole world cannot buy enough. Buying and selling gold, instead of buying and storing it, requires flexibility. You can get this with an ETF (exchange traded fund) that tracks the price of gold bullion. We wrote about Gold ETFs in our article How to Make Money in Gold Investments. The good parts of holding shares of a Gold ETF are that you are not paying to store your gold and buying or selling does not require you to take or give up physical possession. You can buy and sell your Gold ETF shares just like you would a common stock.
And, speaking of stocks, there are gold mining stocks as well. A gold mining company that is well run will make money whether the price of gold is high or low. The price of the stock will be lower when gold is low and higher when gold is high. But, the price effect is multiplied with gold mining stocks. When the price of gold starts to go up, the price of a well-chosen gold mining stock will go up faster. When the price of gold starts to fall, gold mining stocks lose value faster than gold itself.
Both gold ETFs and gold mining stocks can be bought and sold rather easily and do not require a secure storage like gold bullion. These facts make them practical gold investments over time from important to individual retail investors.
Hedging Investment Risk with Gold
Many investment advisers recommend that gold be a small portion of any well-balance investment portfolio. If you choose to follow their advice, there are practical gold investments and impractical ones. You can as easily hedge risk in your portfolio with a gold mining stock or gold ETF as with gold bullion. And there is a lot less fuss and bother when you own shares instead of having gold bars costing you money for secure storage.