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The Most Important Questions to Ask before Investing in Gold

Jul 24, 2020

Daniel Friedman


You've probably already seen that there are a variety of alternatives for your gold investment. Each investor has their reasons for investing in gold, and your reasons should inform your choice of how to invest. Though every investment needs a specific kind of knowledge and expertise to do it in the best possible and profitable way, precious metals need different ways to invest smartly. One of the most important and famous of all the precious metals is gold, a hedge against losses. If you are looking to invest in gold, here are questions that will arise in your mind, and the answers to them to help you invest right.


Which form of gold should I buy?


Physical gold is an element and a mineral. Historically, gold's value was rooted in its relative rarity, ease of smelting, minting, and working, its resistance to corrosion and other chemical reactions, and its distinctive color. As a precious metal, gold is used for coinage, jewelry, and other arts throughout recorded history, religious relics, and political signs of authority and wealth. It's also been linked to health. In the past, a gold standard was often implemented as a monetary policy. Still, gold coins ceased to be minted as a circulating currency in the 1930s, and the world gold standard was abandoned for a fiat currency system after 1976. Gold can often come in various forms. It depends on what your purpose of buying the gold is. If you are going to use the gold to get jewelry made in the future, buying gold coins and bars would be the best way to go about it. Whereas, if you are more into investing and trading gold, buy gold bullion. You can buy bullion coins and bars.


How much capital can I put?


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. The question is, how much capital can you afford to tie up in an investment? 

Physical gold produces no 'interest' or 'income.' Although technically easy to resell, it requires a little effort and time. 

Conversely, buying gold is a great way to ensure we don't fritter some of our savings away but park our wealth somewhere and forget about it for a while. We typically suggest putting 15% of your net-worth into gold.  


When Should I Buy Gold?


Many proponents of gold suggest it is a good hedge against rising prices. The facts do not support this statement, though. Gold is often a better hedge against a financial crisis, rather than a hedge against inflation. In times of crisis, gold prices tend to rise. But that is not necessarily the case during periods of high inflation. If there's a financial crisis or recession on the horizon, it may be wise to buy gold. However, if the economy is in a period of high inflation, it may be smart to pass. The best time to invest in gold is when the stock market looks shaky; it shows that the other stocks are unstable, and most investors are going to use gold to cushion their losses, making the gold price increase soon. Another good time to go long on gold is when the gold to silver ratio is low, which means gold is cheaper.


What are the Current and Historical Prices of Gold?


Investors should start by looking at the spot price of gold, which can be bought and sold for at that moment. The spot price of gold is quoted per one gold ounce, gram, or kilo. For example, by the end of the day on Friday, April 24, 2020, the gold spot price was $1,739.90 per ounce, $55.94 per gram, and $55,939.04 per kilo. Today, August 27, 2020, Gold shot up to $1,940 per ounce, $62.37 per gram, and almost $63,000 per kilo!  

If you look at historical gold prices, you'll find that the cost of gold shot up dramatically in the 2000s. In 2008, the gold price varied from around $720 to over $1,000 an ounce. As the economy sunk further into the recession, gold prices soared to approximately $1,888 in 2011 due to investor sentiment and demand. By April 2020, gold prices declined slightly from where they were almost a decade earlier but continued to perform well amid an economic downturn.

Something similar happened in the late 1970s. After the price increase in the '70s, gold spent the next 20 years declining in value before going back up around 2000. After the recent dramatic increases in the gold price, it may again languish for a considerable length of time. While languishing, your gold investment would not be producing any interest or dividends.


How and to whom will you resell?


It is crucial to remember that we only ever profit on our investment when we sell it. It is only then that we lock in our gains. Therefore, what is your exit strategy, and are you ready to go at a moment's notice, if one day the price looks attractive enough to sell? Or are you keeping your gold for the next generation, in which case, do they have written instructions on how to sell an asset with which they may not be familiar? We highly recommend never selling gold to a dealer who visits a town for a set day but a dealer who has a registered address and is well established with customer feedback.


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