Pros and Cons to Consider When Investing in Gold

Posted by Sonal Mathur on June 12th, 2019

If you want to invest and diversify your investment portfolio, then gold is a good option. This precious metal in itself is not a currency, but carries a certain value. Its price is influenced by many factors, including global market volatility. In the past, people used to purchase gold jewellery and asset as a memento of prestige. But now, it is more than just a household precious item.

Gold investment does not involve jewellery but coins and bullion. However, as a common man, if you own gold jewellery, you can use it to fund immediate financial needs by taking a loan against the ornaments. Banks may offer you a gold loan because again, gold carries a value and if you default on repayment, the financial institution will be able to recover the outstanding amount by selling the jewellery.

As understood, gold in any form can help you with funds, be it by selling the asset for hard cash or securing it against bank/NBFC for a loan. But what about gold investment, how does that work? Investing in gold has its potential upsides and downsides like any other investment tool, thus, you must be aware of what you are getting into before buying gold coins or bullion.  

What Are the Pros of Investing in Gold?

Investors usually invest in gold because it is relatively easy to buy and sell. You can also test the gold content in the coin in terms of weight and purity before the purchase. Here are some pros of gold investments.

• Protection against Inflation: People invest in gold to protect themselves from inflation. Even if the value of dollar lessens, gold will retain its intrinsic value and can be sold for a profit when the currency value stabilizes. So you can sell gold at the right time and make the most of it when gold prices rise.

• Simple to Choose: While you need a lot more knowledge about property or stocks as an investment, it is relatively easier to understand gold investment and invest in gold coins or bullion.

• Diversification: It is always wise to spread investments across different industries and sectors than putting all the eggs in one basket. So, if you have invested in bonds, stocks, property, etc, then you should also consider gold. You may want to invest up to 10% to 15% of income into this asset. In case any of the other investment plummets in value, gold can stabilize the windfall.

• Tangibility: If you are the one who is uncomfortable with assets you cannot touch like Cryptocurrency, shares, etc, and sceptical about the retention value of electronic assets, then gold is a perfect investment for you. Gold is tangible and as a physical asset, you know that no matter what, its value will usually always rise, and it is something you know that exists for real.

What Are the Cons of Investing in Gold?

Many do not prefer investing in gold as it does not suit their financial outlook. As gold prices are speculative, people who are particular about generating a fixed amount of return may invest in other forms of investment. So what are the cons of investing in gold that keeps people away from it?

• No Immediate Yield: You cannot earn an instant yield on gold until you sell this precious asset. Owning gold is like keeping the asset locked up in a bank vault and waiting for it to grow in value so as to earn a profit. There is a cost associated with insuring and storing gold. But, if you invest in tools that earn an interest, then you can get constant returns, unlike that from gold.

• Lower Capital Gains: Shares and real estate properties tend to gain more in value on a long-term as compared to gold. So many investors do not approve of gold investments due to lower capital gains.

• Hassle during Transaction: Dealers usually keep a margin when purchasing and selling gold, so you may not always get maximum value of the gold you own. Also, you have to authenticate the purity and weight of the gold before acquiring it. Even when you wish to sell the asset, you have to prove that the gold is genuine. Thus, there is some amount of hassle involved during its transaction.

• Uncertainty of Price: As gold prices are influenced by inflation of domestic economy, value of dollar, supply and demand factors, there is a lot of uncertainty about its price. At one time the price of gold may rise, and at the other, it can tumble. Thus, you have to keep a lot of patience when choosing gold as an investment option.

Final Thoughts

You should always think carefully about investments you make, be it in gold or any other asset. If you are confused and do not have complete information about gold investment, then you can take a professional advice. Gold is indeed an attractive investment for those who want to look beyond corporate stocks, bonds, and shares, etc.

Like other investment tool, gold too has its share of pros and cons. Thus, you have to study downsides and upsides of gold and understand if it is the right choice for your financial goals.