Finance What’s the best way to invest in gold? In the past, an investment in gold or silver meant stashing bars or coins in a locked chest buried in the backyard. These days, there are many other ways in which you can secure exposure to precious metals. Physical gold Bars, bricks, coins, wafers, nuggets, or even jewellery – for those who prefer the security (either real or psychological) that comes with holding physical gold, there are plenty of options to investigate. Keep in mind, however, that some of these options (particularly jewellery) have higher markups than the price of the actual gold which it contains. Fees and other costs associated with buying physical gold also tend to be a lot higher than what you’d pay to buy securities. ETFs, mutual funds and physical trusts Pooled products – mutual funds, exchange-traded funds (ETFs), trusts and similar structures – are probably the most convenient way to gain precious metals exposure. They can be bought or sold easily, usually at very little cost, and there are none of the storage hassles that come with holding physical gold. A relatively new twist on the pooled structure is the physical trust – unlike an ETF or mutual fund that holds paper claims to the underlying metal, a physical trust buys and stores physical metal on behalf of its unitholders. For some, this tangible ownership structure adds a layer of security and peace of mind that a paper contract just can’t provide. Store of value – Gold is fundamentally different from other forms of money in the world: it’s very difficult to make (or more accurately, mine) more of it. This scarcity is one of the big reasons why it tends to hold its value over time. It’s also a big reason why gold tends to do well during times of inflation. For snowbirds who rely on the proceeds of their portfolios to fund their day-to-day living expenses, this ability to hold its value against the erosion of purchasing power can make gold a pretty attractive asset. Safe haven in times of volatility – When geopolitical tension or economic uncertainty is on the rise, gold often (though not always) enjoys strong performance. Much of this is because of gold’s reputation as a safe asset – the one asset that will at least hold its value when everything else in the world is in trouble. Not only can this provide a kind of anchor for more volatile assets within your portfolio, it can also provide you with considerable peace of mind. Currency independence – Gold (and, to a lesser extent, other precious metals) is the closest thing we have to a “universal” form of money; it’s recognized and accepted almost anywhere in the world, usually at a transparent price that isn’t tied to any specific government, political system or geographic region. That quality makes it a lot less vulnerable to monetary policy, political events or conflicts that affect other national currencies. For investors concerned about their overexposure to a particular currency, that’s a very positive quality. As attractive as these benefits are, there are several downsides to investing in gold. These include: Lack of income – Unlike a lot of other assets, gold doesn’t generate interest or dividend income. Nor is its value tied to a growing stream of future profits or rents. For snowbirds who rely on their portfolios to generate income, that can be a bit of a bummer, particularly when there are a variety of other investments that can deliver cash flow in the here and now. Volatility – Gold is a notoriously volatile asset, subject to wild mood swings based mostly on sentiment and perceptions, rather than on the kinds of business fundamentals which drive the performance of most stocks over the long term (the volatility goes double for silver and other precious metals). For investors who find themselves staying up at night fretting about short-term market movements, that volatility could be more trouble than it’s worth. Storage and other hassles – For those who choose to invest in physical metal, finding a place to put your investment can be a hassle. A home safe is one option; however, it needs to be professionally installed with a proper security system or it could be a target for theft. A safety deposit box is another possibility, but these incur additional costs. Liquidity can sometimes be a concern as well, since selling a bunch of gold coins or bars quickly at a fair price isn’t always as straightforward as selling stocks or bonds. Herd behaviour – Because the performance of gold and precious metals is often driven by sentiment, they can be highly susceptible to herd behaviour – the tendency for investors to “pile on” to a given asset after it’s seen exceptionally strong short-term performance. This amplifies volatility and can make timing a purchase or sale more challenging. Not a “productive” asset – Unlike a lot of other assets, gold doesn’t do much for the overall economy. Once you dig it up, it doesn’t employ a whole lot of people, contribute to a growing industrial base or create new technology or innovations. That may not be an issue for some investors. But for others who prefer their money to contribute to the greater good (whether economic, environmental or social), gold might have a lot less to offer than other investments. 30 | www.snowbirds.org
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