While the commercials and sales pitches for gold have certainly died down a bit, it?s still tough to not see or hear something on gold at least once per week. Before investing in gold, here are some pros and cons of investing in gold, silver or other precious metals:
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- Inflation Protection ? The biggest reason people cite for buying gold is that it ?hedges? against inflation, meaning that if the value of the pound were to plummet, gold would hold its value (or even increase) and you?d be better off. It?s a tough concept to understand currencies, but think of it this way ? currencies fluctuate and can be worth more or less depending on what the government does, but there is only so much gold in the world and it?s very tough to find these days, so it would be unlikely to lose its value like a currency could, especially during periods of inflation.
- Fear Currency ? Gold prices tend to spike when something unexpected and negative happens in the world. Obviously, we?ve had many such events in recent years including a financial crisis, so that has helped propel gold prices higher. When some people have run out of money and considered things like selling their personal property, taking a personal loan or unloading some old gold jewellery, the recent price run up has served them well and they sold their gold. But there?s no guarantee they?ll make money on jewellery in the future.
- No Guaranteed Return ? A problem with gold is that people rely so much on historical prices and think it will continue to be such a great investment when that is not guaranteed by any means. This year for instance, gold hasn?t performed very well and there are periods where gold can lose 10 percent or more in a short period of time.
- No Dividend ? Unlike stocks, bonds and other interest-bearing investments, gold pays no dividend, so if the underlying price doesn?t move, you?re not guaranteed any routine payments. At least with stocks or bonds, you know that monthly or quarterly you?ll get something.
- Holding Costs and Transaction Fees ? Depending on how and where you buy gold, it can be so expensive to perform the transaction or to store it safely that you never actually earn a profit. Many investors that don?t do their research end up losing money in the long run due to all the fees involved.
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In summary, most people would agree that trying to trade precious metals is probably best left to professional investors and gold hasn?t continued its stellar run we saw in the past few years. I like to think that markets are ?efficient? and the current price already reflects fair value.
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