Should You Buy Gold?

Gold has been a valuable commodity for centuries. Throughout recorded (and unrecorded) history, gold has been used as a currency and a symbol of wealth and power. Gold has been found in gravesites, buried alongside remains dating back as far as 4,500 B.C.E.

This long-standing value demonstrates the stability of gold and its attractiveness over the millennia. Gold is considered by investors to be one of the safest investments, recovering its value quickly through economic downturns. Its price often tracks in opposition to market or economic swings.

When investor confidence is shattered (as it was in 2008), gold prices climb as nervous investors looked for a safe place to put cash pulled out of the market. Gold is a haven in times of inflation because it retains its value much better than currency-backed assets, which may climb in price, but drop in value.

Good Idea

Investing in gold is not like buying stocks or bonds. You can take physical possession of gold by buying either gold coins or gold bullion. Bullion is gold in bar form, with a stamp on it. The stamp contains the purity level and the amount of gold contained in the bar.

You can also buy stock in gold mining companies, gold futures contracts, gold-focused exchange-traded funds (ETFs), and other regular financial instruments. Futures contracts are an agreement to buy or sell a commodity at a future time, at a predetermined price.

ETFs are a bundle of securities traded on an exchange. What this means for investors is if they purchase a gold-backed ETF, they are purchasing shares of a trust's ownership in gold, but have no claim to the physical gold itself.

Investing in gold with the idea it never loses value is the wrong approach. Like any investment or financial asset, gold is subject to supply and demand pressures that cause the price to fluctuate.

In 2008, the price of gold varied from around $720 an ounce to almost $980 an ounce. As the economy sunk further into the recession, gold prices soared to $1,854.40 in 2011 due to investor sentiment and demand.

Gold Speculation

Because you can buy gold in many forms, an important question to answer for yourself is what form of gold is best for you, should you decide to invest.

You could purchase physical gold. Gold in the form of coins or bullion must be stored in a secure environment. This may involve paying a broker, bank or another firm a fee.

One of the benefits of investing in gold (and having the physical form) is that if you need to cash it in, in a hurry, you will be able to. Keep in mind that if your gold is in an IRA, there may be penalties for early withdrawal.

Gold coins and bullion are often sold at a premium and bought at a discount, so you may not get the market price when you need to sell.

Investing in gold securities is similar to investing in any other security, except prices may move with the stock market.

If you are investing in gold mining companies, the price of the stock may reflect the company’s financial health and market position more than the price of gold. This can create a false sense of security if you are using it as a hedge against risk.

Final Thoughts

Investing in gold, whether the physical metal or gold-related securities, is a complicated decision and not one to enter lightly. If you do decide to purchase physical gold, make certain you are buying from a reputable dealer. If you are purchasing gold for your IRA, you must use a broker to buy and a custodian to hold your gold.

A general rule of thumb financial experts suggest is that you should not have more than 10% of your assets in gold. This is believed to be good advice because it acts as an insurance policy. If you lose all other stocks in a crash, your gold should follow historical trends and go up in value, keeping you from losing everything.