The first thing most financial advisors will ask a client is why they are investing. They will also usually how much time the client has before they think they will need the money. These two pieces of information will figure heavily in the kinds of investments a particular client is suited for.
When markets are volatile, and the standard advice doesn’t apply as consistently as it used to, financial advisors will inform many of their clients about profitable opportunities to invest in gold. How does gold help an investment portfolio?
How Hedges Work
A hedge is a way for investors to protect their gains in the market. One way to think of hedges is to think of insurance. If a stock position increases in value by $1000, the investor will naturally want to keep that gain. They certainly don’t want that same position to decrease by $1000 and wipe out their profit. So that investor might employ what is known as a hedge.
In the everyday world, insurance is a hedge. The purpose is to offset losses with accompanying gains. Futures contracts are one of the most popular hedges. Options are also a common way for investors to secure gains and try to avoid unnecessary losses.
One of the most powerful hedges is gold.
Gold as Insurance
Gold has always been a tremendously strong repository of value. Whether it is held in coins, bars or in other forms, gold maintains its value fairly consistently over time and also paces the rate inflation fairly closely, meaning that value stored in gold is likely to be far less vulnerable to the inflationary loss of buying power an equivalent amount in cash would be. These are some of the most profound gold investing factors for success.
When gold is established as a companion investment to a stock or bond position, or as a foundation-level position in a larger portfolio, it often will rise in value when other investments generally drop in value. Gold is considered a safe store of value, and demand for it often rises when other investments and classes of investments turn bearish. Gold is also very popular among currency investors who continuously look for profitable opportunities to invest in gold, as it provides a dual-strategy option of arbitrage against foreign demand and a hedge against exchange rate fluctuations, especially the currency native to the gold position.
Gold as Investment
Because it is a strong repository of value and is far less vulnerable to inflation, gold meets one of the most important requirements of a good investment. The other requirement is that an investment’s gains exceed taxes. Because gold is a value store, it is generally not subject to the same kinds of taxes as a more volatile stock or bond portfolio might be. Until it is sold, a gold position is likely to face few taxes at all, and if it is incorporated into a tax-advantaged account of some kind, any gains may avoid taxes altogether or at the very least mitigate them.
Avoiding loss of value through taxes and inflation is another of the many gold investing factors for success. Gold is not a growth investment per se, and it is not likely to produce dividends or regular payouts like a bond or a mutual fund might. What it does provide is consistent safety. Its very presence is an automatic hedge against riskier positions in other markets.
A Path to the Future
Gold has been a good investment for thousands of years. It is now used in a wide variety of high-technology manufacturing processes, and mining technology has never been more advanced. Anyone looking for a good way to build a safe store of value for their family and legacy would be well advised to consider putting at least a portion of their investments into gold. It is one part of an overall strategy for wise investing.