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Common Questions on Gold Investment - What do investors ask?


Welcome to a new series on Gold investments. We will release educational information to help you with your gold investments each week.

Disclaimer: The viewers, thoughts, and opinions expressed in the text belong solely to the author and not necessarily to the employer, organisation, committee, or individual.

The most common question: "How much should I invest in Gold?"

Let's address a couple of questions before determining how much to invest.

How long do you plan to invest in Gold?

Finding out an exact or estimated timeline of your investment will help you plan the lifespan of your portfolio. Each individual depending on their needs and requirements, will differ. 

What amount of funds are you comfortable with investing?

Question 2 is equally as important as number 1. One should look carefully at his/her finances and determine what an appropriate amount to set aside for investment after taking daily expenses, emergency funds, and monthly commitments into account. The amount that you set aside for investment should not affect you significantly. It is essential to understand that no investment is 100% secure and should expect to make losses.

Generally, for investors that approach us with no set investment budget in mind, it is recommended to:

a) Stable Income (Salaried Employee) - Individuals with a stable monthly income can invest 8% of their net worth into Gold. Why 8%, might you ask? We believe that 8% is more than enough exposure to Gold, which leaves you additional investment funds for other assets. 

b) Freelancers, Business owners, & others (Inconsistent Income)- Individuals that fall into this group should be slightly more reserved compared to the (A) group. A 4% exposure to Gold is sufficient to ensure that it does not dent the bank account. Group B individuals will be prone to different risks that may require liquidity. 

What is your risk tolerance?

How often have we heard this question when approaching a bank to invest in unit trusts, shares, and bonds. This question requires an immense level of self-reflection from the individual. 

It is good to discover your personality traits as an investor and harness that strength. To help you decide on your risk tolerance.

"Isn't it too expensive to buy now? Gold price today looks very high!"

We address this particular set of concerns with factual data on the historical prices of Gold. 

Source: World Gold Council 2021

Analyses of the chart indicate that the price of gold has increased over both a 10-year & 5-year period. The 5-year period suggests an estimated 27% increase in the gold price, while the 10-year period shows a 31% increase. If we were to take the data into account, we could conclude that the price we pay today is lower than in the future.

Generally, investors that fall under short-term investment (under one year) should be more price-sensitive when buying Gold. The period for appreciation of the gold price is shortened by the investment period. However, investors who view Gold as a long-term investment will be less price-sensitive today because there is additional time for price fluctuations compared to the former.

"Is there a right time to invest in Gold?

The short answer is that there isn't a perfect or right time to invest. Why is that? Let's view different sides of the coin that supports gold investment during specific economic crises versus opposition.

Traditionally, investors have used and are still using Gold today as an asset to hedge against inflation (rising prices). What do you mean & how does it work?

It is essential to understand a few concepts.

  1. Gold has an inverse relationship with the United States ($) dollar. If the US dollar appreciates, the price of gold will fall and vice versa. 
  2. Inflation: - The general rise in the prices of goods and services. How does inflation affect Gold?

Let us take the example of US inflation that has spiralled out of control over the last few months due to supply shortages, conflicts and vaccination against the Coronavirus. 

Rapid inflation affects the American people by eroding their purchasing power. For example, if today the price of a loaf of bread is $1.99, and inflation tomorrow is 5%, that same loaf is valued at $2.09. The monies spent yesterday are worth 5% less, and thus if you had the same amount yesterday, you would not be able to purchase the same loaf today. 

Americans would invest in gold to protect their wealth when inflation spirals out of control because the US dollar's value is or has eroded. On the other side of the coin, "when is it the wrong time to invest in gold?" We use the real-world example of the recent decision that saw the Federal Reserve of America (Central Bank) raise interest rates. Why did they increase the rates, and what are the implications?

To begin understanding the decision to manipulate interest rates, economists view the growth of the economy, unemployment and inflation figures. During rapid expansion (economy performs well), inflation tends to trail behind. Inflation follows with economic growth because demand outweighs supply, and as a result, suppliers begin to capitalise on excess demand or a lack of stock by increasing their prices. The result saw the prices of goods and services become more expensive. 

The Federal Reserve's decision to combat rapid inflation by contractionary monetary policy is to limit the amount of money in circulation. The Fed applies an interest rate hike of 25 or 50 basis points (0.25/0.50%). A rate hike means several things:

a) The cost of borrowing money becomes expensive because the interest on the loan that one service is higher

b) Saving money in the bank is better because one can yield higher interest for the amount stored.

c) Reduction in demand for goods and services as people spend less money. People would prefer to invest in assets that benefit from increased interest rates.

We hope these few questions are sufficient to answer some of your investment queries. Stay tuned next week for part two of the series.

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