Because of the war in Ukraine, many people have asked me if I want to buy gold now. So I thought I would revisit this post I wrote a while ago and updated today.
Before buying gold, make sure you understand the basics of commodities. A commodity is typically a resource that the market considers to be equivalent or nearly equal, regardless of who produced it. In other words, raw materials are highly fungible.
Gold is one of the most popular commodities that investors track and trade. Other commodities include crude oil, natural gas, soybeans, coffee, corn, wheat, sugar, rice and iron ore.
The price of gold and other commodities is usually determined by actively traded spot and derivatives markets. How widespread a commodity is also affects its price and profit margin. You can easily follow the SPDR Gold Trust (GLD) if you want to buy gold or just follow how it trades.
Interest in buying gold has increased due to inflation and the Russian invasion of Ukraine. As a result, gold prices have started to rise. Below is the latest chart of gold, silver, and platinum prices since 1970, adjusted for inflation. Gold is now trading around $2,000/oz.
Before you buy gold, you need to know where it comes from
While you may be excited to buy gold now that it has moved higher, take a step back for a moment.
Imagine a tennis court.
Now imagine a cube with sides slightly shorter than the length of a tennis court. No, this is not some kind of New Age meditation. This is actually a way of visualizing all the gold that has ever been mined since the dawn of time.
Most people are shocked to discover the relatively small amount of gold above ground. Indeed, if all that gold were divided equally among every person on Earth, each individual would be entitled to only 23 grams.
Now let’s take a look at some of the top reasons to buy gold, such a rare chemical element that has captivated people for thousands of years.
The state of the economy affects the desire to buy gold
It is important to know the state of the economy before buying gold. Is the country on the brink of a recession that could bring the world to its knees? Or is the economy in a raging bull market with no end in sight?
Everything is connected.
In good times, when the global economy is healthy with low inflation and low unemployment, gold prices generally remain stable. On the other hand, hard times and recessions cause the gold price to rise as demand increases.
People tend to run away to buy gold when the stock market collapses as a hedge against uncertainty in the economy. Gold is known for being relatively reliable in the darkest times.
Investors also buy gold as a hedge against inflation. Gold prices tend to rise when the dollar falls and inflation rises. In addition, you cannot dilute gold, so it is good at retaining its value.
Personally, I think real estate is the best hedge against inflation. Real estate is moving along with the inflation wave as a result of rising rents and rising real estate prices. Furthermore, real estate offers utility, unlike gold. As a result, I am a heavy buyer of real estate in this inflationary environment.
Gold prices affect the countries that import and export it. In addition, gold is often used to measure the value of a currency. The value and strength of gold thus affects world trade and foreign exchange.
Reduce volatility and protect against inflation
You can help dampen your portfolio’s volatility with gold because of its ability to withstand inflation and times of uncertainty. Indeed, in the years since World War II (when inflation hit the US hardest), the price of gold has risen.
For example, the decision to buy gold can be seen as a shield to protect yourself against the weakening dollar and against unforeseen economic crises. Unfortunately, there is a chance that the Third World War will break out as a result of the Russian invasion.
How to buy gold?
There are a plethora of options for those looking to buy gold, so tailor your purchase to your specific needs and comfort level. Buying physical gold is of course a time-honored option.
Others prefer to invest in gold ETFs such as GLD, gold mining companies or gold mutual funds to avoid the logistics of storing, moving, insuring, etc. There are options for all budgets and levels of financial expertise. Just pay attention to the costs when buying a mutual fund in gold.
Personally, I find that simply buying GLD and rare gold watches is the easiest method of buying gold. In my past life I bought and sold rare watches for fun. The prices of rare watches continue to rise. Even basic steel Rolexes seem to have strong price inflation.
There are even Gold IRAs for those who are fond of gold. Gold IRA companies can help you convert your paper assets into gold and coins using a process known as a gold IRA rollover. But I wouldn’t worry.
Slow production + high demand = higher gold price
Gold production growth cannot keep up with demand. Gold production increased by 1.9 percent in the first 90 years of the 20th century. But in the past 20 years, it has grown at just 0.7 percent per year.
Meanwhile, the demand to buy gold continues to grow worldwide, especially in China and India. The Indians in particular have an insatiable demand for gold. Furthermore, the Vietnamese also love gold. But it is really the demand from China and India that is driving the excess demand for gold.
With the history of gold’s countercyclical effects coupled with strength in uncertain times, the desire to buy gold has increased. At the time of this post-update, the price of gold has fallen from its all-time high. So maybe you could own a small piece of that golden cube the size of a tennis court.
Gold ETF GLD vs Gold ETF Performance VTI, Vanguard Total Stock Market Index Fund ETF
Below is a 5-year comparison chart between the gold ETF GLD vs. VTI, the Vanguard Total Stock Market ETF. VTI has outperformed since the end of 2020. But due to all the uncertainty, GLD will start to outperform again in 2022.
In general, it’s not a bad idea to have some gold in your portfolio as a capital preservation investment. See how GLD held up during the March 2020 stock market crash.
More recommendations for building wealth
1) Invest in real estate in times of uncertainty
Stocks are volatile while gold generates no income. That’s why real estate is an attractive investment if you want to temper volatility, diversify your investments, boost passive income and build wealth at the same time.
My favorite real estate investment platform is Fundrise. With more than $2.5 billion in assets under management and more than 210,000 investors, Fundrise is the leading vertically integrated real estate platform today. Investors can invest as little as $10 in their diversified real estate funds.
Fundrise focuses primarily on single-family, multi-family and rental properties in the Sunbelt. With lower valuations, higher yields and strong demographic shifts, Fundrise’s investments are well positioned for a positive long-term trend.
The combination of rising rents and rising capital values is a very powerful asset builder. I have personally invested $810,000 in private real estate across the country to take advantage of lower valuations and higher rental returns.
2) Manage your finances in one place
One of the best ways to become financially independent is to get a handle on your finances by signing up with Personal Capital.
They are a free online platform that collects all your financial accounts in one place so you can see where to optimize. Before Personal Capital, I had to log into eight different systems to maintain over 25 different accounts (brokerage, multiple banks, 401K, etc.) to manage my finances.
Now I can just log into Personal Capital to see how my stock accounts are doing and how my wealth is evolving. I can also see how much I spend each month.
The best tool is their Portfolio Fee Analyzer, which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees. I had no idea I was paying! They also have the best Retirement Planning Calculator out there.
There is no better free tool online to help you track your wealth, minimize investment costs and manage your wealth. Why gamble with your future?
The main reasons to buy gold is an original post from Financial Samurai. I have been writing about personal finance since 2009 and have worked in finance for 13 years. If you want to read more about investing and building wealth, sign up for my free weekly newsletter.
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