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The Advantages And Disadvantages Of Investing In Gold

Photo courtesy of Giorgio Monteforti via Flickr creative commons.

Is investing in precious metal a smart or foolish decision?

For every bill in your wallet and figure in your bank account, there is a floating exchange rate (fluctuating value) that determines its worth. While most have no issues with this fiscal system, others are wary about the inflation of paper money and prefer to invest in gold, which is theoretically less likely to lose value and preserves well over time.

There are both advantages and disadvantages to investing in gold, which makes the choice to do so a controversial decision. Here’s some insights into the world of gold investing, benefits and downfalls included.

Advantages of investing in gold

  • Gold tends to increase in value over time, where the US dollar tends toward decline. It also has double value, in that it is intrinsically valuable but also appreciates as a collector’s item.

  • The amount of gold in the world is limited; it cannot be printed or created by the government like cash and credit.

  • Gold is good for storing; it was valuable 2,000 ago, is still valuable, and will be valuable in the future, though the value itself may fluctuate.

  • Gold is “fungible,” meaning it is identical in quantity and value in different parts of the world.

Disadvantages to investing in gold:

  • Gold can decline in value in relation to paper currencies depending on how expensive it is when it is bought. Because prices fluctuate, if gold is bought at a time it is selling at a price higher than the US dollar, investors can lose money when exchanging (especially if it is a short-term investment).

  • Gold can’t readily be exchanged for goods and services. Basically, if you go into a store with a bag of gold coins, you won’t walk out with a platinum TV, but the same bag of gold you came in with.

  • Gold pays no interest, and will only increase in value if demand increases. Investors do not benefit in the same way they do from bonds or saving accounts, which over time can earn the investor a lot of extra value as principal grows with each year of savings.

  • Gold must be safely stored, or the investor runs risk of it being stolen or lost.

In 2014, the price of gold fell by 15pc between July and November, from $1,338 to $1,168, to hit a four-year low. Analysts attribute this downward trend to the growing strength of the U.S. dollar, and predict it to continue.

Even so, debate continues over advantages vs disadvantages, mostly because it’s unclear how, in the long run, the value of gold might change.

Perhaps in an emergency crisis in which banks are rendered useless, the gold investors will be the last to laugh. On the other hand, it may be that these “goldbugs” are overly paranoid, and gold investments will prove to be more trouble than they’re worth.

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Jennifer Markert