Gold has played a major role in many nations’ economies. It however is no more a primary form of currency like it used to be but, it is still very strong and serves as a solid long term investment and a valuable addition to one’s portfolio especially in a bear market.
Over the last 3 years, gold prices have sharply declined. But over time, it has been indicated that it is a good decision to invest in gold. The key factors to consider while investing in gold are as follows:
- Investors invest in gold when they need a safe haven.
- Investors rush to gold when the US or global economies experience decline in the economy.
- Investors buy gold when the financial market freezes.
- Gold will exist even if the world falls into a deep hole of financial crisis.
Investing in gold
There are many ways to invest in gold. The most popular ways are as follows:
- Buy gold directly in the form of bullions or coins.
- Buy shares in a company that produces gold.
- Invest in gold futures and options.
- Invest in gold ETF.
Advantages of investing in gold
The following are the reasons why it is advantageous to invest in gold:
- Gold has easy liquidity in any part of the world.
- The universality of gold is unparalleled.
- Gold has managed to maintain its value over time even with the decrease in its price.
- Gold's value rises when inflation takes hold. During the inflationary time, gold is a more stable investment than cash.
- Since gold moves inversely to stock and currency value, it is an effective way to diversify your portfolio.
- Gold is not subject to political chaos and is a universally desired investment.
- Gold is used for making jewellery and in electronics, there is a reliable demand that can stabilize the price of gold. These markets force the price of gold to be higher in times of increased demand.
Disadvantages of investing gold
Having mentioned the advantages of gold, one must also be aware of its disadvantages. They are as follows:
- There is no passive income. You have to wait for the value of gold to increase, so that you can sell it.
- Your investment may lose value when the overpriced gold corrects its price.
- You need to physically buy gold and store it and it needs to be insured as well.
- Capital gains tax rates are higher on gold investments.
- When the gold value increases, dollar is devalued. Gold doesn’t offer adequate returns in other markets.
So, is gold a good investment in 2016?
The best time to invest in gold is when you are expecting inflation. Inflation is not expected when the local currency is strong. When the reserve banks are printing out more local currency, it is an indication that it is a good time to invest in gold.
The main question is if buying gold in 2016 a good investment. To be able to answer that question, you must consider the following factors:
The US Fed decided to increase its interest rates before the end of 2015. An increase in the interest rate of a country leads to increase in investment from global investors. This in turn will strengthen the dollar and weaken other currencies. If you agree with this forecast, then investing in gold is not a good decision now.
Engage in hedging
You can invest in gold if you want to minimize the decline in your portfolio in the event the US or the global economies experience an economic shock. If your interest is to invest in gold as a hedging tactic, then now is the time to invest in gold.
Long term investment
You can never predict the financial markets. There are always periods of economic contraction and expansion. But if you invest in gold when the rates are relatively low, and then wait for the next contraction. When that happens, the gold prices will surge and you can sell your holdings.
The other reasons why you must purchase gold now is that the US Fed is delaying the interest rate hike and it could lead to decline in the US dollar. The other reason could be renewed debt crisis and decline in the mining production which is leading to a supply crunch.
Gold price forecast for 2016 is looking optimistic. The central banks are continuing to buy gold and are simply not selling. Central banks were not so keen on holding gold all this while, but now their opinions are changing now as even the prices don’t seem to be their main concern. The demand for gold is still solid but there is a shortage of gold in the market. Gold prices are expected to rise in 2016.
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