When I was a finance student, I was intrigued to learn not just about stocks and bonds, but also other traditional assets that certain investors love to hold in their portfolios. One asset that I was always confused by was gold. Gold has long been considered a safe haven investment during times of economic uncertainty. However, the return on gold can vary significantly from year to year, making it a somewhat unpredictable investment.
In US dollars, the price of gold has historically risen on average between 2% and 3% annually. Another important factor to consider when thinking about these alternative assets is a comparative asset. The most important thing when investing, or at least one of them, is the idea of opportunity cost.
What is an opportunity cost?
Opportunity cost is the price of missed opportunities or the advantages a person, company, or economy could have gained but forwent in favour of choosing a different path. It is the expense of choosing one option over the next best one. It is a notion that aids in comprehending the compromises and decisions made in the face of shortage.
The opportunity cost, for instance, is the potential return a person might have received if they had chosen to put their money in a different asset, like bonds or real estate, instead of Gold.
This average return, though, hides significant price swings brought on by political and economic events. For example, during times of recession, the value of gold tends to increase as investors flock to the perceived safety of the precious metal. However, it’s important to note that past performance does not guarantee future results and that other factors such as interest rates, currency values, and investor sentiment can also affect the price of gold.
When I was learning about gold, it was this that kept me intrigued, the fact that in pockets of time, an investor could make a considerable amount of money.
Additionally, it’s important to keep in mind that, unlike stocks or bonds, the return on gold excludes dividends and interest. This indicates that gold does not produce any income and that its value is exclusively based on its relative scarcity.
The fact that gold returns might vary significantly from country to country is another crucial factor. This is because of things like the currency in which it is expressed, the inflation rate, and other national-specific issues. For instance, the return on gold priced in a given currency will be lower if that currency is decreasing against the US dollar.
The return on gold can be volatile, so even while it can be a valuable complement to a diversified portfolio, it’s vital to keep this in mind.
How can you buy gold and How do gold ETFs work?
There are many different ways to buy gold, one way is a gold ETF, which is perhaps one the easiest for investors. A gold ETF is again a type of asset that tracks the price of gold and can be bought and sold on stock exchanges like any other publicly traded stock. They are considered a passive investment, as they seek to replicate the performance of the underlying benchmark, in this case, the price of gold. For those that like to hold the physical asset, you have to think about the tax implications. Most goods and services in the UK are normally subject to VAT (Value Added Tax). There are few exceptions, though, and gold bullion is one of them. Gold bullion, which includes coins and bars, is exempt from VAT in the UK since it is viewed as a “financial instrument.” This implies that you will not be required to pay VAT on the purchase price if you purchase gold bullion in the UK. However, you will be required to pay VAT if you buy other gold-based things, such as jewellery. It is also important to consider the security risks involved in owning both physical assets and holding them virtually through an ETF.
Discover valuable insights and tips for successful investing by reading our previous post where we explore the rise of ETFs. Click the link to access it now.