Gold and gold coins are considered to be one of the most traditional investments that exist. For hundreds of years, this was an asset highly valued by the most varied types of society.
One of the advantages most considered by investors is that gold is a physical asset, which still backs the monetary reserves of many countries in the world.
What is gold investment?
The investment in gold is an option that the investor has at his disposal to diversify its portfolio.
Because it has a reserve of value, gold is usually more sought after in times of economic crisis and high inflation.
So, to invest in gold, you basically have two ways: to physically buy gold bars or buy bonds linked to the variation in the value of gold.
But regardless of the path you choose to invest, you need to know that you are investing in a variable income asset, which is therefore subject to many fluctuations.
In other words, this metallic commodity is sensitive to the weather of the global financial market like any other commodity.
Advantages of Investing in Gold
Some of the advantages of investing in gold include:
1. Possibility of diversification
To reduce the risk of your investments it is important to have a diversified portfolio. In this sense, gold can be an interesting option for investors.
2. Asset for protection
Generally speaking, gold is considered a type of protection ( hedge ) during times of inflationary crisis. Therefore, it tends to show a high valuation in these types of crises. Since gold is unlikely to suffer devaluations such as those seen in the currency of a particular country, which is going through turbulent times.
3. Liquidity and recognized value
One of the factors that makes gold a good investment is its liquidity, even internationally. Gold can easily be converted to cash. In summary, compared to other investments, gold is one that offers the greatest liquidity.
4. Maintenance of value
Gold retains its value over time. Even if the price drops, the inherent value of gold doesn’t change much.
This metal has no expiration date, that is, due to its chemical characteristics, it never rusts or corrodes over time, like other metals. Therefore, its value does not depreciate.
Disadvantages of Investing in Gold
Among the main disadvantages of gold we can mention:
Everything that happens in the economy will influence the price of gold. The result of this can be the verification of strong fluctuations in the price of this commodity. For example, sometimes the value of gold increases when the stock market suffers big losses.
That’s because investors rush to invest in gold at high prices. When the panic subsides, the price of gold corrects itself. This can lead to losses for investors.
2. Not an income-generating asset
Gold is not a passive investment like stocks and fixed income bonds. Passive investments provide the investor with regular income, such as interest and dividends.
With gold, you will only get income when you sell in the market for a higher price than you paid.
3. Storage difficulty
Having physical possession of the gold can give an investor a big headache because if you like to keep physical gold at home, you run the risk of it being stolen.
On the other hand, if you place your gold coins and jewelry in a bank vault, you must pay safekeeping fees annually.
What can change the price of gold?
Gold is a commodity traded based on the supply and demand of the world market. Thus, the dynamics of supply and demand for the product, in the final analysis, determine what the price of gold will be.
Gold price: get to know our opinion on this type of investment
In other words, when the demand for gold increases, the price also tends to increase in order to maintain market equilibrium. On the other hand, if demand decreases, the price will also fall.
So, among the factors that influence the supply and demand for gold, we can mention those related to investments, consumption, economic growth and the supply of the product.
More specifically, we list below how these factors can change the price of gold:
Inflation and gold prices
Periods with high inflation tend to increase the demand for gold, as this metal offers a store of value.
Worldwide instability and the gold price
Events with a great global impact such as terrorist attacks, imminent war, or some kind of serious economic crisis, increase the demand for gold.
That’s because metal offers the security that no other asset can offer in times like those described above.
Interest rates and the price of gold
High interest rates increase the opportunity cost of holding gold, lowering the demand for gold and hence its price.
Growth of the economy and the price of gold
Economic growth in some emerging countries tends to raise wealth levels. Consequently, it can also increase the demand for gold.
Gold offer and the gold price
The supply of gold is made exclusively through mining. Then, a decline in the supply curve increases raw material scarcity. As a result, investors end up paying more for gold.