Investing in Gold - Is it Worthwhile to Invest in Gold?

 Gold represents security and consistency. Investors traditionally flee toward gold when the stock market experiences strong fluctuation. This has historical reasons since gold is considered to be stable in value. It is often referred to as the world's oldest currency. As the German economist Hans Sennholz once said:

“For more than two thousand years, gold’s natural characteristics made it man’s universal means of trade. In comparison to political money, gold is honest money that has lasted for centuries and will continue to exist after today’s political fiat currencies have faded.”

In fact, historical finds indicate that it was already used as a means of exchange 5000 years before Christ. This and the fact that it is a limited commodity gives gold an intrinsic value that, unlike some cryptocurrencies, will never fall to zero. Gold has therefore played an important role in the economy right up to the modern age.

Until 1933, anyone could exchange US dollars at a bank for a fixed amount of gold. The banknotes represented a claim to gold and the currency was linked to the price of gold. This system was called the gold standard and ended in 1973 with the Bretton Woods agreement when the fixed exchange rate was abandoned.

In the 1980s, gold became less attractive to investors, because shares and funds began to yield higher returns and the stock market experienced a long period of prosperity. This changed around the turn of the millennium. Gold prices experienced a revival as a result of severe financial crises. Driven by demand from Europe and Asia, the gold price reached a new all-time high following the financial crisis of 2007.

Golden investment: Bars, coins, stocks, or funds

Gold belongs to the asset class of natural resources, namely of precious metals. These include silver, platinum, and palladium. The price of gold generally refers to one ounce (28.35 grams) or one troy ounce (31.10 grams). There are several ways to invest in gold: bars, coins, gold funds, and stocks.

Bars and coins are also referred to as bullion and are considered safe investments. Coins are available from most banks, coin dealers or over the Internet. The price is initially based on the daily changing gold price. In addition, there are coinage fees, as a result of which large and well-known coins (e. g. Krugerrand, Maple Leaf or American Gold Eagle) are relatively cheaper than smaller ones. The disadvantage of bullion is the associated risk of theft and loss. Although one can reduce this risk by renting a safe-deposit box, these boxes bear corresponding costs for the investor.

The cost of minting gold bars is slightly lower than that for coins. In addition, bars can be purchased in larger units than coins. However, bars can only be sold as a whole, which investors should keep in mind when buying them. Apart from that, the same disadvantages of bullion apply, namely the risk of theft and the associated storage costs. 

This is where another variant of the bullion investment comes into play: vaulted gold. Unlike bars and coins, which are stored in safe-deposit boxes, vaulted gold is stored in large high-security safes. The investor usually has no direct access to the gold; he must apply for access first. Storage costs are also higher than for a safe-deposit box, reducing returns. However, the bars are not only stored in an extremely safe place, they are also usually insured against theft.

In contrast to bars and coins, gold funds and gold stocks are highly speculative. Gold funds invest their investors' money primarily in mining companies that aim to extract precious metals. Examples include operators of gold mines, but also silver and copper works. Funds generally perform well when gold prices rise. However, the funds are also subject to strong fluctuations and are usually associated with additional costs (expenditure surcharge, premium, etc.).

Gold shares are equities of natural resource companies that mine or trade gold. They are subject to strong fluctuations and are usually issued in foreign currencies. This entails an additional exchange rate risk for the investor. In contrast to bars or coins, however, they are easily traded and can be sold quickly. Trading gold shares is considered highly speculative and is only recommended for professionals. The same applies to gold certificates, which are index or leverage certificates not covered by gold or other assets.

Golden investment: Neither interest nor dividends

Gold does not do work, money does. Investments in companies generate returns, promote innovation, and create jobs. The companies can pay investors interest or dividends. Money stored on savings books or accounts is often also invested in companies by the bank and therefore pays interest.

Gold, on the other hand, is not productive and therefore investments in gold do not pay interest or dividends. Gold only achieves returns for investors through price increases. But again, the costs associated with the purchase of gold - such as storage fees, sales surcharges, and taxes - have to be deducted in order to obtain the net return.

However, an investment in gold generates less long-term returns than a diversified investment in shares. According to the consumer portal Finanztip, a diversified portfolio of global equities generates more than twice as much return as an investment in gold.

Golden investment: Is it worthwhile investing?

The answer to this question depends on what type of investor you are. Basically, one can distinguish between two gold investors: the speculative investor and the security-oriented investor. While the speculator expects an increase in the price of gold, the security-oriented investor wants to protect himself against future financial crises by investing in gold.

There are clear advantages and disadvantages of investing in gold. An investment in gold is advantageous if one invests predominantly in shares. It then serves to diversify the portfolio, as gold prices often move in the opposite direction to share prices. If share prices rise, the price of gold falls and vice versa. Gold thus serves as a kind of hedge against falling share prices. No more than 10 percent of one’s assets should be invested in gold for this purpose. This way, gold can slightly reduce the price fluctuations in your stock portfolio.

A disadvantage of investments in gold is that there are strong price fluctuations. Although gold is considered crisis-proof, it fluctuates more strongly than a diversified equity portfolio in the short and medium term. The price fluctuations of the gold price can be seen in the price development of the last 10 years. The gold price reached its lowest level in 2008 at just under EUR 550 per troy ounce. As a result of the financial crisis, the price of the precious metal rose rapidly and reached its peak in 2012 at EUR 1,379. By 2014, the gold price fell below EUR 900 again and is currently listed at around EUR 1,100 per troy ounce. 

Another disadvantage is the currency risk associated with gold. Gold is traded in dollars. As such, if you buy gold in euros, your investment is subject to fluctuations in the exchange rate between the euro and the dollar. This is well illustrated by the best investments of 2017: last year's gold investments achieved a return of 8.9 percent - but only if you look at the gold price in dollars. If you bought and sold gold in euros, on the other hand, the exchange rate led to a loss of 2.3 percent. 

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