Friday, 28 February, 2020

How Investing In Gold Is Different From Other Strategies


With regards to making a decision about how to allocate your retirement assets, investing in gold is a very interesting topic, not just because of the characteristics of gold as an asset, but the psychological dynamics of the average investor.

Let’s address the elephant in the room: gold investing is nothing like buying stocks and mutual funds. This is something that is absolutely vital for any serious investor to understand, and to remember that gold is an entirely different pet within the financial industry. An animal which is very much misunderstood. Not convinced? Nicely, without even getting into an economics discussion, simply ask yourself how do you feel about gold investing? When you think about shares or bonds, do you get because captivated as you do when you consider gold bullion or gold coins? Most likely not… Right? Here’s why:

A stock certificate is a piece of paper that might give you a return on your investment if
1) the company’s plank of directors chooses a good management team, and
2) if that management team is able to continuously develop a competitive business strategy, and
3) if that team can actually implement that strategy, and
4) in the event that negative economic factors don’t impede its potential success. That’s a large amount of “Ifs” as well as “Ands” to wager your financial security on.

Compare that with investing in gold.
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Along with gold bullion or coins, most likely purchasing a tangible asset, something you can hold in your hands, and something which is recognized as being valuable in every part of the world. Furthermore, when you think about gold bullion or coins, the mind becomes captivated by feelings of security and stability. This is perfectly natural, because as humans, we all tend to gravitate toward things that help us feel safer and more protected. When it comes to investing in gold, these feelings of security and stability are usually universal emotions that have been experienced by countless people through centuries… People who noticed the value in owning a tangible asset versus owning pieces of paper (stocks, bonds, currency) that only have promises attached to them, but no physical value.

But how is investing in precious metal supposed to increase security?

Obviously, there are never any guarantees with any type of investment, but when it comes to investing in gold, it’s important to understand how it’s supposed to help protect your assets. One of the biggest factors is that gold prices often move around in the opposite direction of other purchases (i. e. it doesn’t have an ideal correlation to them). What this means is that investing in gold can help you prop up the cost of your nest egg when stocks and shares and mutual funds are falling in value, because gold costs would tend to go up during that period, as investors pull their money out of the markets and route all of them into gold investments.

Let’s have a recent example, the credit crunch associated with 2008. The chart below shows a period of about 18 months and even comes close the movement of the S&P 500 index versus gold prices.

You will notice that on many occasions, the SP 500 index (red line) plus gold prices (yellow line) relocated in completely opposite directions. When stocks were decreasing in value, precious metal prices were rising, and vice versa. This is a very important consideration for anybody investing in gold. What this means is that investing in this precious metal can be a strategy to lower the overall risk of your portfolio. If you think that everything is great with our economy which stocks are going to keep going up, after that you’re probably not worried about your nest egg. But if you have misgivings concerning the markets, and if you’re still concerned about the aftershocks of the recession that will began in 2008, then investing in gold can be a viable strategy for safeguarding your portfolio against any potential future downturns in the financial marketplaces.

Do understand that investing in gold doesn’t guarantee a happy future. Anyone who touts this precious metal as a “no lose” solution is just not being honest together with you. But when it comes down to building defense for your retirement assets, gold can be a valuable tool in your strategy. Precious metal bullion’s lack of direct correlation towards the markets means that its price does not always move in tandem with stocks, and in fact, will often move another way. This makes gold an effective hedge during times of economic uncertainty, and gives you the ability to preserve the value of your nest egg when paper resources (like stocks) are nose scuba diving.

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