Historically, gold has played an important role in the economies of many nations. Although no longer a primary form of currency, gold is still a solid long-term investment and can be a valuable addition to the portfolio, particularly in a bear market gold ira.
Gold was considered a universal currency for hundreds of years. Due to its recognized value around the world, a gold standard was used since the Byzantine Empire more than 1,500 years ago. Until recently, in fact, gold was used as a world reserve currency.
In 1944, after the signing of the Bretton Woods Agreement, the dollar replaced gold as the world’s reserve currency. But even after this deal, gold continued to be used to back the national currencies of various countries. However, in 1971, Richard Nixon eliminated the gold standard in the US and other countries soon followed. Surely right now you are asking yourself this question: Is it profitable to invest in gold? We will try to give you an answer through this article.
Advantages of gold as an investment
Although it is no longer a primary form of currency in the developed world, gold is still a popular investment for a number of reasons.
- Liquidity. Gold can easily be converted to cash anywhere in the world. Besides real cash, the liquidity and universality of gold has no competitor.
- It maintains its value. Gold tends to maintain its value over time. Economists consider that even the price of gold is not indicative of its value. That is, even if the price goes down, the underlying value of gold doesn’t change much. This is mainly because there is a fixed amount of gold due to the fact that it is a commodity, while the US dollar, which is a form of fiat currency, has no inherent value.
- Hedging against inflation. Gold increases in value when inflation takes hold. Since gold is priced in euros, any deterioration in the euro will logically lead to a higher price for gold. As a result, during times of inflation, gold offers a much more stable investment than cash.
- Diversification. Adding different stocks to your portfolio is an essential way to diversify and reduce the overall risk of your investments. Also, because gold often moves inversely to market and money values, it provides an especially effective way to diversify.
- Universally desired investment. Gold remains a universal commodity. Although countries sell their currency futures, Treasuries and other securities around the world, unlike gold, they are subject to political chaos.
- Gold is used as an input in products. Since gold is used in the production of various products, including jewelry and electronics, there is a reliable demand that further stabilizes the price of gold. Also, in times of increased demand, these markets can force the price of gold higher.
Disadvantages of investing in gold
While gold can be a great investment for the number of reasons outlined above, you should also be aware of some disadvantages of investing in gold before venturing into it. They are the main ones:
- Gold does not generate passive income. Other investments, such as stocks and bonds, can derive a portion of the value from passive income in the form of interest and dividends. However, the only return you can get from gold is when it rises in value and you decide to sell it.
- Gold can create a bubble. When the economy is unstable, many people start investing in gold, but when investors start to panic, gold can be too expensive. This, in turn, means that your investment could lose value once the price corrects.
- You need physical and secure storage. If you choose to buy real physical gold, you will not only need to store it, but you will also need to insure it. Otherwise, you will not be able to replace it if it is damaged or stolen.
- Capital gains tax rates are higher on most gold investments. The capital gains tax rate is around 28%, which is much higher than the ordinary capital gains rate of 15%. That said, companies that don’t invest in gold directly are still taxed at the ordinary rate.
- Increases in the value of gold coincide with the devaluation of the local currency. Many economists argue that gold only increases in value when the euro is devalued or inflation is strong. As a result, critics of investing in gold feel that gold does not offer adequate returns in other markets.