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Is It a Good Idea to Buy and Hold Gold as an Asset?

Vahid Chaychi

Many ordinary people and also experts and mentors like Robert Kiyosaki are saying that buying gold, as an asset, is a great and safe investment, because FIAT currency is losing its value more than ever. They are right about FIAT currency and its value that is going down like crazy. But, are they really right about gold? Is gold a good asset to buy and hold for a long period of time? In this article, I have explained gold, as an asset, represents an increase of more than 560% over the past 30 years. Here, I explain more about this because gold is an important and attractive metal and people always ask about it.

First let’s see how we can buy and hold gold as an investment. Then, I will explain whether we should do it or not, and what are the best ways that are less risky.

What Are the Ways to Buy and Hold Gold as an Investment?

There are several ways to buy and hold gold as an investment. Here are some common methods:

1. Physical Gold:

One of the most traditional ways to invest in gold is to buy physical gold, such as gold bars or coins. Investors can purchase gold from dealers or online retailers and store it in a secure location, such as a safe deposit box. In 1991, 100 ounces of gold would have cost you $36,000, and it could have yielded a $168,100 profit after 30 years. However, holding such a quantity of gold is both risky and costly. The good news is, at LuckScout, we offer a free complimentary storage service to our gold customers.

2. Exchange-Traded Funds (ETFs):

Investors can also buy gold ETFs, which are funds that invest in physical gold or gold-related assets. ETFs allow investors to buy and sell gold through a stock exchange like a traditional stock, making them a more liquid investment. Banks may sell physical gold in the form of coins or bars, but they also offer gold-related investment products such as gold ETFs or gold certificates. There are several advantages and disadvantages of buying gold exchange-traded funds (ETFs).

Advantages:

  1. Accessibility: Gold ETFs can be easily traded on stock exchanges and are accessible to investors with a brokerage account.
  2. Liquidity: Gold ETFs are highly liquid and can be bought and sold quickly and easily, similar to stocks.
  3. Low Transaction Costs: Compared to buying physical gold, buying gold ETFs typically incurs lower transaction costs and storage fees.
  4. Diversification: Investing in gold ETFs can provide diversification benefits to a portfolio, as gold tends to have a low correlation with other asset classes.
  5. No Storage Costs: Unlike physical gold, gold ETFs do not require storage or insurance, which can reduce the costs associated with owning gold.

Disadvantages:

  1. Counterparty Risk: Gold ETFs are not backed by physical gold but rather by the underlying assets of the ETF, such as gold futures or options contracts. This exposes investors to counterparty risk, or the risk that the financial institution backing the ETF will default or be unable to meet its obligations.
  2. Volatility: Like any investment, the price of gold ETFs can be volatile, and investors may experience losses if the price of gold declines.
  3. Management Fees: Gold ETFs are typically subject to management fees, which can erode returns over time.
  4. Limited Upside Potential: Gold ETFs may not offer the same upside potential as owning physical gold or gold mining stocks, as they do not directly benefit from increases in the price of physical gold.

3. Gold Futures:

Investors can buy gold futures contracts, which are agreements to buy or sell a specific amount of gold at a future date at an agreed-upon price. There are several advantages and disadvantages of buying gold futures contracts.

Advantages:

  1. Leverage: Buying gold futures contracts allows investors to gain exposure to gold prices with a smaller initial investment than buying physical gold or gold ETFs, as futures contracts are traded on margin.
  2. High Liquidity: Gold futures contracts are highly liquid and can be bought and sold quickly and easily on futures exchanges.
  3. Price Transparency: The prices of gold futures contracts are transparent and publicly available, which can help investors make informed investment decisions.
  4. No Storage Costs: Unlike physical gold, gold futures contracts do not require storage or insurance, which can reduce the costs associated with owning gold.

Disadvantages:

  1. Volatility: Futures contracts are a highly leveraged investment and can be subject to significant price volatility, which can lead to large gains or losses for investors. Unless you want to hold for years, buying and selling as day-trading or even holding gold futures for a short period of time can be too risky.
  2. Counterparty Risk: Like gold ETFs, gold futures contracts expose investors to counterparty risk, as the contracts are traded on exchanges and require a clearinghouse to guarantee transactions.
  3. Time Horizon: Gold futures contracts are typically traded with a fixed expiration date, which means that investors need to be aware of the time horizon of their investment and manage their positions accordingly.
  4. Complex Investment: Futures contracts are a complex investment and require a good understanding of the futures market and associated risks, which may not be suitable for all investors.

Overall, gold futures contracts can be a useful tool for investors looking to gain exposure to gold prices with a smaller initial investment. However, they should carefully consider the advantages and disadvantages of gold futures contracts and seek the advice of a financial advisor or investment professional before making any investment decisions.

4. Gold Mining Stocks:

Investors can also invest in gold mining companies, which are companies that produce gold. These investments are more indirect than owning physical gold, but they offer the potential for higher returns as the value of the company grows.

Advantages:

  1. Leverage to Gold Prices: Gold mining stocks often have a strong positive correlation to the price of physical gold. If gold prices rise, the profits of gold mining companies can increase, potentially leading to higher returns for investors.
  2. Diversification: Investing in gold mining stocks can provide diversification benefits to a portfolio, as gold mining companies are often exposed to a range of other commodities, such as silver and copper.
  3. Potential for Income: Some gold mining companies pay dividends to shareholders, which can provide a source of income for investors.
  4. Active Management: Investing in gold mining stocks allows investors to take advantage of the expertise of professional fund managers, who may be able to identify undervalued companies or emerging trends in the gold mining industry.

Disadvantages:

  1. Risk of Company-Specific Issues: Investing in individual gold mining stocks exposes investors to company-specific risks, such as mismanagement, labor strikes, or regulatory issues.
  2. Volatility: Like any investment in the stock market, gold mining stocks can be subject to significant price volatility, which can lead to large gains or losses for investors.
  3. Operational Risks: Gold mining companies face operational risks, such as fluctuations in production levels, unexpected costs, or declines in ore grades, which can impact profitability.
  4. Market Risk: Gold mining stocks are subject to market risk, which can be influenced by a range of factors such as changes in interest rates, geopolitical events, or macroeconomic conditions.

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