Gold is something of a hot topic this year among investors who like commodities and alternative investments. This is because after a significant slide that resulted in gold hitting a four-year low last November, a significant rebound to start 2015 has made the market seemingly less predictable than it’s been in a decade, if not longer. But if gold investment is something you think you might consider in the near future, here are four things you should know before you get into detailed analysis of the current market.
1. Know Where You Stand On Gold
One of the most important concepts for any investor to grasp is to avoid becoming emotionally attached to stocks or other investments. That probably sounds obvious to any seasoned investor, but for young people or those new to financial engagements, it can be easier said than done.
It’s a simple reality that to many of us, certain investments may be more appealing than others for personal reasons. For example, someone with a passion for environmental practices may be inclined to invest in TESLA purely for the sake of personal preference and support. These are the instances in which emotions must be ignored. While this tip holds true with any investment, it is particularly important with regard to an alternative resource such as gold or another precious commodity.
This is because with precious commodities, like gold, there’s a certain exotic or fun quality that can come into play. Many people use gold to diversify their portfolios, and compared to purchasing ordinary shares in ordinary companies, buying physical gold bricks can be an exciting way to do it! To that end, it’s very important to understand that this shouldn’t blind you to making strategic decisions. A sexy investment is not necessarily a sound one.
2. Know The Forecast For The Dollar
There are a number of factors often pointed to as major influencers of the price of gold: political turmoil, the stability of major economies, demand for gold and jewelry, and the strength of the U.S. dollar. And in the past few years we’ve seen that the dollar may trump the other factors in its ability to shift the landscape for gold. Despite significant political conflicts in the Middle East and Europe, relatively high demand in China and India, and some uncertainty in the Euro Zone, a strong 2013 for the dollar seemingly contributed to gold prices reaching a four-year low toward the end of 2014.
This is not to say that whenever the dollar is strong, gold will be weak. In fact, Wall Street Journal just posted an article about a recent streak of joint success for gold and the dollar. But the fact remains that any disciplined gold investor must have a very strong feel for the performance of the dollar, as it often proves to have the strongest affect on gold. Indeed, this is one reason that some investors are hesitant to forecast a strong recovery for gold in 2015; the dollar appears to be on steady ground, relatively speaking.
3. Know Where You’re Buying & Selling
Buying gold is not the same as investing in a gold mining company, and for that reason the practice of it can be somewhat unorthodox. So, before you invest, make sure you have a good idea of where and how you can do it. At one point, it was actually quite difficult for private investors to gain access to a reliable physical gold supply. Now, however, such supplies and market exist online. Online marketplace Bullion Vault explains that by providing access to the gold bullion market, as well as secure and professional vaults, they’ve erased these concerns for investors. Indeed, those looking to invest in gold now have the ability to buy and sell good delivery gold bars (essentially meaning those of guaranteed purity) at fair prices and store them at insured vaults around the world.
Further educating yourself on this process is essential before making an investment. If you elect to use a gold purchasing site online, you’ll need to determine what currency you’ll be buying and selling in, which of the available vaults you’ll want to store your purchase in, or even if you’d like to gain physical possession of your bullion. These are all personal decisions that vary between individuals. But knowing the available options is a crucial component of gold investment strategy.
4. Know The Purpose Of Your Investment
Finally, it’s vital to understand the purpose of a gold investment within your portfolio. Strictly speaking, this purpose can be anything you define it as. However, strategically speaking, most who delve into the gold market are looking for two things: a deflation hedge and long-term gains. Market Oracle has a very thorough outline of the concept of hedging against deflation. The idea of long-term gain is based simply on the relative unlikelihood of gold prices jumping in any significant way in a period of just weeks or months. Basically, the expectation of many investing in gold is that the price will rise slowly and steadily over time, and it will never drop off in a sudden and/or significant way.
This calls to mind a recent post in which we described the benefits of a Durable Competitive Advantage, which is something Warren Buffet advises investors to look for. Not to twist Buffet’s words—he’s actually rather critical of gold—but a similar strategy can apply to precious commodities. While Durable Competitive Advantage investments are typically geared toward new companies and emerging markets, gold (one of the oldest markets in existence) involves the same practice of waiting for a long-term payout. Determining the wisdom of waiting for such a payout in a commodities market is up to each individual investor, but this, in addition to the hedging concept, is generally the idea behind any significant purchase of gold bullion.
Understanding these basic concepts and principles will help you to develop a sound foundation for gold investment. This is not to suggest that once you grasp the ideas in this article you should go and invest in gold. But because this is a type of investment that works so much differently from an ordinary stock or bond, education on the product, market, and practices of investment is necessary.