Gold | Financial Literacy F

Gold

What is gold and how is it used?

Gold is one of the most desired metals in the world. It is used for in so many different ways including:

Jewelry
Finance/Investments
Medicine
Electronics
And so much more!

This lesson, we will be focusing on golds value towards investment.

Why do people invest in gold?

They invest in gold as a back-up to fiat currency, which has no ingrained value (ex: paper money or coins). Meanwhile, physical, raw materials such as gold, have actual worth because they have been used historically, and they cannot be printed (gold is minted). If an economy ever experiences inflation, or the stock market crashes, gold is a good preventative way to backup your financial security, and will retain its value unlike fiat currency. Gold is also very high in liquidity.

Rocky Mountain Gold Mine

This chart shows the performance of gold during stock market crashes. As you can see, the price of gold rose dramatically, alongside its value. This is why gold is generally a safe and secure investment that has a good reputation as well as a steady, and even increasing value (If the value of gold increases, your investment will do the same). This is why gold is used when economic recessions are present, because it will act as a preventative measure towards a financial downfall.

How do you invest in gold?

There are three different ways to invest in gold:

1) Physical Gold: If you want to buy physical gold bars and coins, you can buy them off of reputable stores online, or any reputable stores you personally know that sell gold. Investors generally keep physical gold in their homes.
2) Gold ETF's: Exchange-traded funds, also known as gold ETFs are units representing physical gold in the form of paper or any invaluable material. Gold ETFs are essentially backed up by physical gold, and they tell a bank (or any other financial institution) that you own real gold based on your ETF. The difference between Gold ETFs and physical gold is that you are putting your complete trust into a custodian of a financial institution, rather than holding on to the gold yourself. A custodian bank is an institution that looks after the physical gold, or any other product, (backed up by your ETF) and secures it in a vault (Ex: Custodian JP Morgan of the New York Mellon corporation).

"In addition, the Custodian has agreed to indemnify the Trust for any loss or liability directly resulting from a breach of the Custodian’s representations and warranties in the Custodian Agreement, a failure of the Custodian to act in accordance with the Trustee’s instructions or any physical loss, destruction or damage to the gold held for the Trust’s account, except for losses due to nuclear fission or fusion, radioactivity, war, terrorist event, invasion, insurrection, civil commotion, riot, strike, act of government or public authority, act of God or a similar cause that is beyond the control of the Custodian for which the Custodian will not be responsible to the Trust. The Custodian has no obligation to replace any gold lost under circumstances for which the Custodian is liable to the Trust."

This explains how any damage inflicted to your gold that resides in a financial institution, beyond the custodian's control does not make them responsible to replace any gold that was lost.

3) Trading Futures: Gold futures are deals made by a buyer and seller in which the buyer and seller decide on a settlement day, where the exchange of gold between the buyer and seller will take place. Traders use this time to determine the direction of gold (whether it goes up or down), and hope to make a profit when the value of it increases. In essence, a gold future is just an agreement between a buyer and a seller that sets a price a day in which the exchange will take place. To begin trading futures, you'll need to sign up with a broker, and start to fund your account once you do so. One of the most common gold future exchanges is COMEX, which trades commodities such as gold, silver, and platinum.
4) Gold Mining Stocks: You can purchase gold stocks through reputable brokers or other exchanges.

Physical Gold Pros and Cons

Requires no trust between an investor and a custodian (who is not present)
Is held privately, and can be completely controlled by the investor
No yearly fees (its yours to keep, and is only charged upon initial purchase)

If you have limited storage/space in your home, physical gold may not be the best for you
Physical gold doesn't let the investor collect any interest
There are many better alternatives to physical gold online, which provide interest

Gold ETFs Pros and Cons

Requires trust with a custodian
Custodian doesn't have to repay you if money is lost that was out of their control. This creates a higher risk in loss than physical gold
There are fees that you must pay to the institution that holds on to your gold.

You can find some of the best deals for gold when investing in Gold ETFs
Purity is less likely an issue than physical gold, as is trust in what you are buying
Very easy to buy and sell gold online than in-person/with physical gold.
No storage needed

Gold Futures Pros and Cons

Gold prices, like stocks, can go up and down, which creates a possibility that an investor can lose their money
Like the stock market, the market for gold futures can crash, creating huge financial loss
Investors need to keep a careful eye on the date of the contract's settlement day.

Like ETFs, you don't need to store any physical gold at your own home
You don't have to pay all at once (You just need to pay it off on settlement day)
Include low trading costs and great leverage

Takeaways

The less confident you are in the stock market, the more gold you may need to invest.
Gold is a good investment against inflation
Gold holds physical value, alongside silver, which can both be used if fiat currency becomes devalued
You can invest in physical gold, ETFs, and gold futures, all of which give you property rights to gold