Of all the precious metals available, gold is perhaps the most preferred as an investment. Investors usually purchase gold as a means of diversification, particularly through the use of derivatives and futures contracts. Like all markets, the gold market too is subject to volatile and speculative speculations. However, there are some very definite pros and cons to gold investments that will help you make up your mind whether to invest or not.
The obvious benefit to gold investments is the potential for capital gains. Gold itself has no physical commodity; it is simply a resource used in the fabrication of jewelry and other goods. Unlike other precious metals that can be mined out of the earth, gold can only be created from gold and no other element. Consequently, the potential profits in this area are also limitless.
There are, however, certain drawbacks to investing in gold investments. One of the main drawbacks to this type of investment is the risk of theft. Because jewelry is easily obtainable on the black market, thieves are attracted to this industry. It is possible that a thief could steal your jewelry while you are away from your home, at an ATM, or while you are traveling abroad. The loss of jewelry due to theft is the second biggest reason for avoiding gold transactions, after the high price of the metal itself.
Gold bullion and gold bars are another popular option for gold investments. Similar to bullion, physical gold bars can be easily stolen. In addition, unlike bullion, the physical gold in bullion cannot be taken with you when you travel. If you do decide to sell your gold bars or bullion for investment purposes, it is important that you keep them in a safe place in order to avoid misuse or theft. This is even more important if you have invested in gold coins.
Liquidity: Another drawback to gold investments is their limited liquidity. Unlike bullion or coins, which have the ability to change hands hundreds of times before they are depleted, gold investments are not able to be withdrawn until the coin or gold bar is "cashed in". This means that an investor will be limited to the number of cash transactions that he or she can make during his or her lifetime. As gold lacks the accessibility that other types of assets do, this aspect can be considered a disadvantage. However, investors can overcome this limitation by carefully choosing the financial institution through which they conduct their transactions.
Diversify: By diversifying your gold investments, you will be taking a calculated risk. In order to minimize risk, diversify your portfolio by investing in different forms of gold. For example, you may want to invest in both gold mining stocks and gold coins. Doing so will help you to ensure that your portfolio stays viable and does not become drained of cash due to one investment failing to take place.
Price Volatility: Although gold investments tend to stay steady, there is an opportunity for price volatility during trading hours. Investors who want to profit from these fluctuations must diversify their portfolio by investing in companies that trade on the commodity market. By doing so, investors will be protecting their portfolio from changes in market prices and therefore increasing its profitability.
These three drawbacks should not dissuade you from investing in gold investments. Gold is one of the safest precious asset classes and there are many ways to improve its volatility and profit potential. Even if you are planning to diversify your portfolio to include other investment options, you should not exclude gold from your initial investment portfolio. Even if most of your portfolio is made up of stocks and bonds, you should still add gold investments to increase your overall portfolio value. If you take the time to do research and educate yourself on each of the asset classes, you will be better prepared to choose which form of gold investment fits your needs.
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