Investing in gold is the object of so many myths and irrationality, So, let’s talk about it.
In terms of investments, there are different options available to us. You have to know that if you want to invest in precious metals, it’s going to be a long-term investment. As we know, the love of gold is not new, just think back to the quest for the Eldorado. Is it profitable to invest in gold? Why invest in gold?
Why invest in gold?
There are many reasons to buy gold but one of the most common is the supposed security of the metal. Gold serves as a safe haven in times of crisis because the price of gold tends to be more stable than that of other financial assets. In addition, you can always monitor the price of gold online through AuCoffre.com.
Beware, there is no guarantee that gold cannot lose value. This will depend, among other things, on the period in which you start to invest. In fact, over the long term, its value has increased. This is partly explained by the fact that gold is closely linked to the value of the dollar. So when the greenback suffers, gold rises, and vice versa. Something similar happens with inflation. When the currency in circulation increases, gold does the same but only six to nine months later.
Beyond its safe-haven and investment value, gold is used in the jewelry and electronics industry, which means that there is a constant demand for the metal. Since it is a finished good, its price tends to rise.
The advantages and disadvantages :
Investing in gold is often a good option to hedge the risks of our investment portfolio. However, one must be aware that gold is not, for all that, free of its negative points.
The advantages :
The advantages of investing in gold are numerous, in addition to the stability already mentioned, here are some more examples:
-The physical gold you save allows you to have a totally liquid asset. In other words, you can sell it at any time, anywhere in the world. This is the closest thing to physical money.
-Unlike other currencies, is not subject to political uncertainty.
-Offers you the opportunity to further diversify your investment portfolio.
-Gold in small quantities can have a significant value, it allows you to optimize storage in the case of physical gold.
These various advantages of investing in gold make it a safe haven for savers concerned about the security of their money.
Gold, like any type of investment, also has its risks and dangers on which one must be informed:
However, the investment is not insured. We should still be wary of the words used such as “safe haven” and others. The value of gold can go up and down: this is a factor that we should not forget to take into account.Because of its strong dependence on the dollar, we should also remain vigilant about the dollar’s exchange rate.
A significant disadvantage is that your gold has to be kept in a safe place.
To overcome these various disadvantages and to benefit from investing in gold, we strongly encourage you to turn to professionals, whether you choose a bank or a professional broker.
If you want to know whether to invest in gold, you should look first at the long-term results: they are absolutely pathetic.
Of course, they are.
In the long run, gold is not the safe haven value that some people believe.
In the short term, however, gold (and gold mines) have done more than satisfy investors.
There are still excellent reasons to believe that the potential of these stocks is far from being exhausted.
Let’s take a look at them together.
Over the past 200 years, real non-inflationary returns on equities have squeezed bond yields, which in turn have squeezed gold returns.
There’s a fundamental reason why in the long run I tend to be much more in favor of equity (stocks) than fixed income (bonds) or gold.
Here’s the reason :
History has shown that owning a company (and stock is nothing more than a piece of ownership in a company) generates the best returns over the long term provided, of course, that you don’t overpay.
In the shorter term, over the period 1977-2017, it is not much more encouraging, with gold not even managing to do better than a U.S. Treasury bond:
Suppose two hundred years ago, you invested $10,000, reinvested the dividends, interest, or other earnings, and let the money do its work without any intervention on your part. How much would your wealth be today, in real inflation-adjusted terms, by asset class?
The stock market investor (in stocks) would have transformed the $10,000 into $5.6 billion. The bond investor would have turned the $10,000 into $8 million. Investing in gold would have transformed the $10,000 into $26,000. And all this is statistically significant.
For almost two centuries, stocks have indeed generated an average return of 7% in real dollars adjusted for inflation.
After all, if the dollar becomes worthless and the United States is forced to switch to another currency – be it gold, silver, bitcoin, or shellfish – companies like Coca-Cola will still be generating large piles of surplus from the currency that people will exchange for the product that the company provides.
Indeed, it is not uncommon to have extended periods of time when bonds generate negative real returns, something that stocks are simply not inclined to do.
For example, between 1966 and 1981, the yield on inflation-adjusted basis bonds was -4.2%.
From 2000 to 2010, on the other hand, bonds outperformed stock market returns (which wasn’t hard to predict when you look at the incredibly low earnings yield on the S&P 500 compared to the yield on U.S. Treasury bonds at the beginning of the decade; you can’t pay 50 times for the profit of a huge company like General Electric or Johnson & Johnson and expect to do well).
Stocks and bonds fluctuate widely.
But stock prices tend to fluctuate more than bonds, all things being equal.
Over the past 200 years or so, we can look at the highest and lowest gains or losses generated by stocks (+66.6% and -38.6%) and bonds (+35.1 and -21.9) in a given calendar year (adjusted for inflation).
On the other hand, investment in gold has historically produced no return.
investing in gold as an asset class
Why does investing in gold generate these pathetic returns over the long term?
Because gold has no intrinsic value.
It is not a productive asset.
When you own a stock, you own a piece of a company that produces goods or services for consumers.
A good business generates a profit.
Every year that goes by, the gold stays in your vault, but the owner of a company like Procter & Gamble, Colgate-Palmolive, Nestlé, or Coca-Cola builds a fortune from the profit generated in that same year from the sale of soap, toothpaste, coffee or lemonade.
From a financial point of view, investing in gold has only one function: speculation.
The value of gold can fluctuate enormously in the (very) short term and generate enormous opportunities for those who are interested in betting (I write ‘betting’) on current government fiscal policy, or the anticipation of economic or political problems in the near future, or a global crisis such as the coronavirus.
In the preparation of this article, I have only seen articles advocating gold as an interesting investment for the future.
But all calculations to demonstrate this is based on 10 years only!
Gold is not a good investment.
Apart from the fact that a direct investment in gold does not provide dividends or interest, its volatility is also almost twice as high as an investment in US equities (including the currency effect!).
Investing in gold is not a long-term investment, it is speculation.
It has always been my way of getting rich, and it will remain so.
I have never had to sell my S&P 500 funds. They have been earning me an average 10% return per year so far, for several decades.
Investing in gold is a different approach.
It requires active participation in the market: buy, follow the price every day, and withdraw at the right time.
Investing in gold (and only investing in physical gold, which is an even more complicated story and different anyway) can be used as an escape mechanism during periods of total catastrophic national collapse, like a Jewish family fleeing from Germany during World War II, who wanted to be able to start again with some capital in a new country.
What are the prospects?
It is likely that the yellow metal will continue to resist for some time, and for various reasons:
- THE FALL OF THE DOLLAR
The evolution of the price of gold is linked to that of the dollar.
The greenback is doing well? Gold becomes more expensive in all currencies except the dollar and this weighs on the demand for the yellow metal.
- LOW-INTEREST RATES
As we have seen, gold does not provide a coupon or dividend. The disadvantage of gold is that it doesn’t yield anything.
Certainly, a disadvantage when interest rates are high.
Today, the situation has been completely reversed. Interest rates are at record lows.
Worse, if you take inflation into account, they are often negative!
Under these circumstances, the fact that gold is not yielding anything is less disadvantageous.
On the contrary, the rise in the price of gold has the effect of allowing investors who hold gold to safeguard their investments.
their purchasing power.
When interest rates are high, gold suffers from competition from fixed-income investments (savings accounts, bonds).
Interest rates are currently at low levels and will remain there for several years to come, which will support demand and thus the price of gold.
- THE APPETITE OF BANKS AND FUNDS
During 2019 and 2020, central banks bought tons and tons of gold.
This is the highest figure in six years.
Why the appetite?
To diversify and strengthen their portfolios, they answer.
The yellow metal is increasingly in demand by investors, whether individuals or professionals.
This can be seen in the success of physical gold trackers.
Until the end of July 2020, tracker managers have bought 899 tons of gold.
To give you an idea, this represents the triviality of some 47 billion dollars.
That too is a record!
The central banks are also on board. While China and Russia, the traditional buyers of gold, are taking a break, Turkey has taken over with a healthy appetite. At the beginning of 2020 alone, this country acquired 163 tons of gold.
More and more professional investors are buying. This is the case of the Ohio Police Pension Fund: its managers have invested 5% of their portfolio in gold, an investment of 700 million dollars. Their objective? To hedge against a resurgence of inflation.
The gold funds (= which invest in gold) listed on the stock exchange have for their part bought more than 40 tons of gold. Some of them have thus increased the value of their portfolios to hitherto unknown levels.
Can gold still go up?
I don’t know.
The blinking lights are shining in different directions.
There are many economic reasons (see above) to support the gold price, real rates are modest, if not negative, and demand for the yellow metal is not weakening.
Experts are unanimous: demand from professional investors will not weaken, which can only support the gold price.
We can also consider that the profit-taking that has recently pushed down the price of gold has been seen mainly as buying opportunities.
On the other hand, the resolution of the corona crisis and Biden’s solid election are contrary factors.
What about the gold mines?
On average, gold mine share prices have gained 40% in 2020.
But some stars found in many funds and indices have gained even more: Newmont Mining (+46%), Barrick Gold (+51%), Franco-Nevada (+37%) and Wheaton Precious Metals (+70%) have done the most good to the portfolios of the funds that bought them.
Several converging factors support their gold mine prices.
Firstly, the rise in the price of gold, which boosts the mines’ profits.
Mines extract gold at an average price of $975 per ounce, which allows them to make exceptional profits and generate more cash than ever before.
Second, the sector is subject to numerous mergers and acquisitions, which fuels interest in these stocks and speculation.
It should never be forgotten that the market for gold mine shares is a relatively small market.
The ten largest mines together have a market capitalization of roughly $200 billion. There are publicly traded companies that alone exceed that amount.
As a result, when the demand for gold increases, the price rises very quickly.
Gold is therefore a very risky asset.
Investing in gold is certainly not a good long-term move, but can be a good short-term decision.
Only invest in gold for diversification purposes and for a maximum of 5% of your portfolio.
If you want to invest in gold, you can, for example, opt for a listed ETF that buys the metal for you.
The price of these ETFs reflects the price of gold.
If you are prepared to take on even greater risk, you can turn to gold mines to take advantage of the operational leverage. The sector may be a good diversification tool, but it is very volatile.