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Gold Investments - Are they worth it?

Gold Investments have recently celebrated a comeback. Currently, the low interest rate policy of the central banks and global economic risks are driving up the prices. Post Brexit, the UK’s referendum to withdraw from the European Union, the gold price has increased significantly. Many have chosen gold as an investment due to the (UK’s and EU’s) political and economic unpredictability. But even in the past, gold was sought after as a capital investment. Whenever crises and uncertainty prevail in the stock markets, gold has many advantages as a safe investment. German investors have always preferred safe money investments because they remember the financial crises and the hyperinflation of the early 1920s. Real estate in particular is very popular as an investment, because it holds a value that remains unaffected from bankruptcies and currency reforms.

Gold Investments

Gold: The Safe Haven Asset

Gold is a precious metal and belongs to the asset class of raw materials. Because it is finite and rare, it is particularly valuable. The raw material gold can not be multiplied at will and remains value-stable. Gold is promoted by mining companies and processed into jewellery, bars and coins as well as medals. It serves as an international currency reserve and has been known for over 4000 years as a means of payment. It fascinates mankind. This alone does not explain why gold is in such demand as an investment asset. Ever since the gold standard was abolished in 1971, gold was sought after as a investment and an insurance against crises, although it could not be exchanged for paper money with a fixed gold rate. Gold does not bear any risks of default; negative interest is also not associated with gold. Unlike paper currencies, gold enjoys the full trust of investors. Gold serves as a protection against inflation or deflation and is a globally accepted means of exchange.

How to invest in Gold

You can invest in gold by purchasing:

  • Physical gold bars and gold coins
  • Securities or shares from gold companies

With securities such as derivatives or certificates, investors can only rely on the increase or decrease of the gold price. Gold funds and gold ETCs, on the other hand, are mostly deposited with physical gold. However, this is not equivalent to actually owning gold. Gold certificates and gold ETCs are subject to the issuer risk, as they constitute bonds, while gold funds and gold ETFs are managed as fund assets instead.

Investors should prefer physical gold as it’s a real asset investment such as real estate. Real estate is a solid value investment and real estate financing is becoming increasingly favourable due to the zero interest rate policy. Gold bars, for example, are excellent heirlooms for children and grandchildren. It is advisable, that investors compare gold prices online, since rates may be lower compared to the retailer.

Possible Risks with Gold Investments

Basing investment decisions on fear is never advisable. Investors who are concerned about inflation, state bankruptcy or currency decline may preferably only invest up to 10% of their assets in gold. Gold has some known risks: The gold price is subject to volatility more than most people like to believe. At times gold was even more volatile than the MSCI World index; in the 21st century it fluctuated between about 250 and 1,900 US dollars. Usually a strong Dollar leads to a lower gold price. This is another drawback for the Euro investor. Investors must always keep an eye on the performance of the Euro against the US dollar in order not to suffer losses due to exchange rate fluctuations. As long as there are zero interest rates on the market, the precious metal gold becomes comparatively more attractive. If interest rates rise again in a few years, the incentive to buy gold as an interest-free investment will be lower. A serious disadvantage for private investors is the storage of the physical gold stocks. Storage is expensive and complex, and interventions in property rights are possible. Anyone who keeps gold in a safe for decades as a security for times of economic crises will not achieve returns. It is only through price increases and the subsequent sale that makes the shiny precious metal a profitable investment.

Gold Price Determinants

On the market, gold is traded as a commodity. The gold price is determined by economic supply and demand. Private investors are looking for alternatives for shares and fixed interest bonds that are susceptible to fluctuations. If they don’t yield interest, they are no longer lucrative enough: The amount of interest thus affects the gold price. Institutional investors find a hedge against price fluctuations in gold assets. Speculators, as well as purchases and sales of certificates and funds deposited with gold, have an impact on the price development of the commodity gold. However, it is primarily the demand of the central banks which determines the gold price. In the past years, the central banks have stagnated their gold reserves and diversified their foreign reserve assets. Additionally, a high demand from the jewelry industry, especially in Asia, has increased the price. In times of financial crises the gold demand is particularly high and gold prices rise. Since the gold supply cannot be expanded artificially and arbitrarily, a growing demand is currently being met by a scarce supply. Gold mining has also become more complicated and more expensive. Furthermore, Brexit has also strengthened this trend, which has been pointing upwards since the beginning of 2016. Companies and investors cannot seriously assess the various implications that the UK will have after the withdrawal from the European Union. Therefore, they prefer the German real estate market and gold as a safe investment. The demand for silver - industrial as well as as silver bars and silver coins - has increased strongly as well.

Experts expect gold prices to increase as long-term inflation expectations are on the rise due to the expansion of the money supply, the declining trust in the fiat money system and the lack of alternative investments.

Conclusion:

  • Gold is not an irredeemable financial promise, but dead capital
  • For small investors Gold is also suitable as an emergency reserve because it can serve as a currency substitute and is always solvent
  • Diversification is essential with financial investments; gold correlates little or none with other investment classes - investments in real estate, equities and fixed-interest investments are also part of the portfolio
  • Investors should invest long term and not lose sight of the costs and disadvantages of gold investments

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