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Is Gold a Good Investment in 2022?

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Nowadays, global uncertainty is reigning in the world. Food prices, along with fuel costs are continually growing, and inflation is breaking historic records. Under these circumstances, we all need to know how to protect our capital from depreciation. Today, we’re going to tell you about your best solution, gold, namely, how to buy it and how you’re able to profit from it. So let’s get started!

The article covers the following subjects:

Why Invest in Gold in 2022

It’s worth starting with why deals with gold are called investments rather than purchases or speculation. The thing is that gold is the international commodity equivalent to which the value of all the world’s currencies and assets is pegged. Gold will never depreciate, unlike fiat currency. Moreover, the less gold will remain in the bowels of the earth, the more it will be worth. For this reason, large institutional investors keep gold in their portfolios not for years but for decades. Gold is often used as a safe-haven asset to protect funds from depreciation because the average fluctuations in gold are much smaller than in currencies or stocks.

Brief History of Gold Investing

As we’ve noted, pure gold has long been accepted as a universal commodity for which any other could be exchanged. Initially, simple pieces of gold were in use, the value of which depended on their weight. Later on, gold was melted into bars and gold coins. At the exact same time, the commonly accepted and still used weight designation of 31.1035 grams of gold, the troy ounce, came into being.

After gold began to be traded on exchanges, its exchange price began to rise sharply, since at all times it was considered to be the primary measure of wealth. The first attempt to refuse gold as an equivalent was made by some states in the middle of the 19th century. It ended with the collapse of the economies of these countries, and the spot price of gold just slowed its steady rise.

The most significant and well-known attempt to abandon gold was made by central banks of developed countries at the end of the XX century. At that time, they actively sold off their gold reserves, transferring money into short-term financial projects. We all remember the crisis of 2008, when all projects were devalued, and the famous rise of gold when spot prices rose from 300 to 1200 dollars per ounce. In 2022 gold reached all-time high of $2062,3. We suppose we don’t need to talk about how much those who bought the precious metal earned in those days.

Gold, Stocks and Inflation

For decades, gold has been one of the world’s three most liquid assets, along with oil and the dollar. It’s also an unsurpassed safe-haven asset for any amount of capital. 

Return on investment is commonly referred to globally as ROI ratio. We suggest you compare the return on investment in gold with the ROI in Microsoft stock from 2018 to 2020.

As you can see in the chart, over this period, investing in Microsoft stock yielded a higher return on investment than buying gold contracts. This is not surprising, since company stocks are a risky asset, and their price fluctuations are much larger than stable gold. However, unlike stocks, which can also drop in value quickly, gold quotes have much more stability.

Another important property of gold is its ability to protect money from depreciation. Higher inflation always leads to a subsequent rise in interest rates, which in turn harms risky assets such as stocks. This is due to the increased attractiveness of bonds and bank deposits, which are more conservative than company stocks. In this situation, investors always transfer their capital from stocks to gold, which ensures the growth of its prices.

How to Invest in Gold

Modern economic development and investment services offer the investor a large number of ways to invest, from the purchase of gold products to the purchase of exchange contracts for gold. So let’s take a closer look at each of them.

Physical Gold

Despite the development of exchange-traded investment tools, people generally prefer to keep their money in something they can touch and feel. This is the reason why gold bars, gold coins, and gold jewelry continue to be the most popular ways to invest in precious metals.

Gold Bars

This type of investment is more suitable for large investment funds or banks, as it implies several difficulties. For example, the main problem with such an investment is the storage and transportation of the metal. Gold is a very heavy yellow metal, and if you buy enough of it, you need to think about logistics and storage, which incurs additional expenses. Also, when buying gold bullion, you pay a mandatory value-added tax, which may be reduced if the bullion is stored in the bank vault where you purchased the gold.

Articles of Gold

In some countries, this kind of investment in gold is almost a national tradition. However, like gold bullion, gold jewellery has many drawbacks. First of all, it’s very unlikely that you will be able to sell the piece at the price at which you bought it. When you buy it, the cost of the jeweller’s work is built into it, and when you sell it, it’s usually only the weight of the piece that is valued.

Gold Coins

This way of investing has gained enormous popularity in recent years. Since the beginning of 2022, the United States Mint has posted a significant increase in sales of flagship gold coins in its monthly statistics. Investment coins, unlike bullion, aren’t taxed when sold, making them the most attractive way to invest in physical gold. But there are drawbacks as well, the main of which is assessing the condition of the coin when it’s sold. Even the slightest scratch can lead to a loss in the value of the coin, hence a reduction in resale profits.

Gold CFDs/ETFs/Futures

Even though people still prefer to buy physical gold, modern exchange mechanisms provide alternative opportunities to make money on it. Among such offerings, ETFs, futures contracts, and CFDs clearly stand out.

Gold CFDs

A pretty popular way to invest in gold, the essence of which is to buy a special contract in the exchange for the price difference, is called CFD. Its main advantage is that you can make a profit from both buying gold and selling it, without actually having much gold. The collateral for such a transaction is your money equivalent to its value. The contract will have the stock ticker Gold or XAUUSD. Another advantage of the CFD for gold is that you have full control over the transaction. You decide for yourself when to buy and when to wait or sell the asset.

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Gold ETFs

An ETF is an exchange-traded fund. Its essence is that it consists of a portfolio of assets that are backed by an underlying asset. In the case of gold-focused ETFs, they’re backed by physical gold and are traded on the exchange like regular stocks. ETF funds were created so that investors could make money on the underlying asset without investing in the physical asset, as well as to diversify the portfolio, and by extension, the risk. The main problem with investing in gold ETF funds is the high taxes and generally fixed investment terms.

Gold Futures

Gold futures contracts are the most popular type of exchange trading and are a substitute for owning gold. As with CFDs, gold futures can be bought or sold. The only difference is that the futures have an expiration date, after which the seller is obliged to make delivery. The final price of the futures depends on this term. That is, you enter into a deal on predetermined terms: to buy a certain quantity of goods at a predetermined price at a certain point in the future. The advantage of a futures contract over a physical asset is that you can use leverage, greatly increasing the volume of the transaction.

Gold-related Stocks, Gold Mutual Funds

In addition to investing in physical gold or exchange-traded contracts, some investors choose to invest in stocks of gold-related companies. Simply put, they invest in shares of gold miners and processing companies. This is a fairly popular way of doing things as well, but it has some significant drawbacks. 

Although these companies deal in gold, the value of their shares doesn’t always have a complete correlation with it. For example, you can compare the share price of the largest gold miners to the price of the precious metal.

Above are stock price charts of two of the world’s leading gold mining companies, gold miner Newmont Goldcorp and Canada’s Kinross Gold Corporation, as well as a chart of gold price itself.

As you can see, Newmont Goldcorp’s stock has had a 246% return from 2016 to this point. That means that every dollar invested in this company’s stock would have earned you $2.46 in profits. Kinross Gold, Canada would have given you a 162% return on your investment, or $1.62 for each dollar invested. Meanwhile, gold itself didn’t grow that much over that period, it added only 56%. 

Thus, it’s clear that investing in gold stock is also a profitable investment. However, if the price of gold is directly dependent on supply and demand for the metal itself, then the purchase price of the company’s shares takes into account many additional factors. And these factors can be both positive and negative. For example, Newmont Goldcorp’s stock rose so much because in 2018 it became known that the company was merging with another giant, Barrick Gold. If the company got into a lot of debt and saw reduced gold production, its stock would have fallen despite the rise in the metal itself. 

So don’t forget to do a little research on the company before you buy its stock.

7 Reasons to Invest in Gold

Now, let’s talk about why investing in gold has been considered one of the most reliable and profitable investments for over a hundred years.

 

Gold Preserves Wealth

As we’ve mentioned above, gold has always been the main measure of wealth and prosperity. Gold is considered to be the only asset that simply cannot depreciate. If a company whose securities you bought went bankrupt, its shares would be worthless. That cannot happen to gold; it will never disappear or lose value. In fact, the less it’s mined, the more valuable it will become.

Gold as a Hedge Against the Dollar and Fiat Money

Recently, the financial world has become increasingly concerned about its dependence on the US dollar. It’s the only currency that can be printed in any quantity. Consequently, the more dollars printed, the lower the value of money will be. And this depreciation applies to all fiat currencies. The only protection against this depreciation can come from a commodity that cannot depreciate. And as we’ve noted before, gold is perfectly suited for this role.

Gold as a Safe-Haven asset

Another great thing about gold is its stability. In times of great global turmoil, the price of gold has always been subject to only minor fluctuations. Even now, when global geopolitical uncertainty reigns and world currency prices are tumbling, gold remains in its multi-year range between $1,700 and $1,800 an ounce. Very often, gold is referred to as a protective asset because there is no other asset with as much liquidity that is subject to such minor fluctuations. This is the reason why investors all over the world prefer to wait out the “storm” in the market by buying gold.

Portfolio Diversification

As far back as the earliest economics textbooks, diversification was among the main precepts of the prudent investor. In simple terms, diversification means not putting all your eggs in one basket. In stock market terms, you shouldn’t put all of your money into one investment instrument. It makes much more sense to spread funds among several unrelated assets. The ideal diversified investment portfolio for an investor should consist of a variety of assets. Gold is one of the best diversifiers as it has a historical negative correlation with stocks: very often, when stocks fall, gold, on the contrary, rises.

Liquidity

The main characteristic of an ideal investment asset is the ability to be sold or bought quickly, i.e. liquidity. Gold is one of the three most liquid assets in the world. Consequently, trades with gold are much safer than with real estate or other tangible assets. You can sell and buy gold on the exchange in seconds.

Hedging

Another property of gold is its ability to hedge financial risks. If you’re an investor, your main fear is a possible crisis and stock market crash. Pay attention to the gold chart: in times of all global crises, it always went up. Consequently, owning gold will help to partially cover losses in the event of a sharp collapse.

Global Demand

Everyone needs gold. Most nations of the world are constantly building up their gold reserves because the strength and sustainability of their economies depend on their size. Gold is also valued for its properties, for example, it’s durable and not susceptible to corrosion. Gold is always in demand by the jewelry industry, which will consume it regardless of its value.

3 Reasons Not to Invest in Gold

Despite a large number of advantages, investing in gold has some disadvantages as well.

Long-term Investment

The modern world is always in a hurry, and time is a key factor that determines the profitability of investments. If we talk about gold, its stability can be considered both a plus and a minus of investment. Because of the limited fluctuations, an investment in gold may begin to pay for itself only after several years, and even decades.

Low Yields

Above, we’ve already compared the returns from investing in gold and stocks, and as time shows, gold very often loses in short term. Gold investing is called strategic investing because gold’s short-term returns can be significantly lower than those of other exchange-traded assets.

Complicated Predictability

Gold’s fluctuations are quite difficult to predict. This is because the asset is very popular, and at different points in time, quotes can react to different fundamental events. It’s much easier with stocks and currencies. There is a global macroeconomic indicator, based on which one can draw conclusions. Gold has no such indicators, and you never know which central bank will want to buy a big amount of the metal, changing the quotes.

Gold Alternatives

Today’s financial market, in addition to investing in yellow gold, can offer a number of profitable alternatives.

Silver/Platinum/Palladium, Rare Earth Metals

In addition to gold, the precious metals that are very valuable in the world include silver, platinum, palladium, copper, rhodium, and others. Even though investing in these metals is not so popular, their return on investment often reaches a huge value. For example, we all know such a rare metal as palladium, which is widely used in the automotive industry and microelectronics. But not many people know that in the four years from 2016 to 2020, its value rose from $700 to $2,800 per ounce, bringing investors a return of 300%.

Gold-backed Cryptocurrencies

Recently, the cryptocurrency market began to gain wide popularity in electronic currencies, the value of which is secured by gold. The brightest examples are Digix Gold, GoldMint, Xaurum, PAX Gold, and DGLD. Many of you probably haven’t even heard of them. However, they’re quickly gaining capitalization and moving up the ranks of leading cryptocurrencies. For example, Digix Gold, the most popular one, moved up to 404th place with $5.3 million in just 3 months in the capitalization ranking.

Chinese Yuan

If you can invest in companies that mine and sell gold, then why not invest in the currencies of countries that have the largest gold reserves and continue to import physical gold monthly? Naturally, China comes to mind first. The fastest growing economy in the world, one of the world’s largest importers of raw materials, and the largest jewelry market. Of course, the Yuan is backed by gold, which makes it one of the most promising and stable currencies.

Gold Exchange Machines

Gold exchange machines are a relatively new way of buying gold. The first country where they appeared was the United Arab Emirates. A vending machine was installed in the Burj Khalifa Hotel, which sells small gold bars weighing 1 gram, 5 gram, and 1 ounce, gold coins from South Africa, Australia, and Canada. There are no official statistics yet, but some analysts note that the machines have become quite popular, which means they may soon be installed in other countries as well.

A Good or Bad Time to Invest in Gold Right Now?

Well, we’ve talked about ways to invest in gold, and now it’s time to talk about when to buy it.

Above, we’ve posted a global graph of gold’s price movement from 2000 to the present. A key tenet of technical analysis says that history is cyclical and all events in history are bound to repeat themselves. Gold is one of the most subject to this law, and the cycles change approximately every 10 years. If we look back 10 years, we notice a cycle of sideways dynamics, very similar to the one that is developing now. After that, the cycle ended, and gold became cheaper. This is the reason why buying gold now in order to sell it at a higher price in a few years would not be a good idea. This applies to long-term investments.

If you’re interested in expert opinions on shorter time intervals, we recommend you look at professional analytics from LiteFinance.

Price chart of XAUUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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