Why Is Gold a Good Investment?
Gold is a commodity that is commonly purchased as an investment, similar to the purchase of foreign currencies or other precious metals. Gold investors purchase physical gold or invest in companies involved in the gold industry in the hopes that the value of gold will increase. Gold has several properties that can make it a good investment, but any investment has the potential to increase or decrease in value.
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History
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The use of gold as an investment, currency and store of value spans hundreds of years. Gold is a rare, naturally occurring elemental metal; its scarcity and the demand for use in jewelry and decorations give gold value. In the past the U.S. government instituted a "Gold Standard" where currency could be traded freely for gold and vice versa as way to stabilize the value of the dollar.
Benefits
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Gold as an investment has several potential benefits that can make it a good investment. Firstly, commodities are typically fungible goods: one unit of the commodity is no different from a different unit, and units can be substituted for one another. This makes physical gold and other commodities such as silver, platinum and crude oil easy to buy and sell. Another benefit is that gold is not a currency produced by a country, which means that monetary policy and political issues may be less able to affect its value. For instance, if a country decides to print currency, it can cause inflation. It is impossible to create gold: it must be mined from the earth and there is a finite supply of it on earth. Many investors believe that investing in gold can act as hedge against inflation.
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Drawbacks
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Investing in gold can have several potential drawbacks. Firstly, if you invest in physical gold, the gold must be stored somewhere, and there is the possibility that it can be stolen or lost. Secondly, like any commodity or other investment, the value of gold can change quickly over time as a result of changing demand. Thirdly, the prices dealers and other gold vendors charge for gold is likely to be higher than the actual value of the gold.
Misconceptions
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Many people believe that you have to buy physical gold to invest in gold. However, it is also possible to invest in gold indirectly by investing in the gold industry. For instance, investing in the stock of gold mining companies or jewelry companies that specialize in gold are ways to gain the benefit of rising gold prices without buying physical gold.
Considerations
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Since any investment has the potential to increase or decrease in value, it is important not to commit too large a proportion of your wealth to any one type of investment. If you choose to invest in gold, diversify by putting some of your money in other types of investments such as mutual funds, stocks and bonds.
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References
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