With gold set to outperform given the current stagflationary environment of stagnant economic activity and high inflation, gold has become a very attractive asset. The last time the world experienced stagflation was in the 1970s, and in that time, gold was the best performing asset, rising from $35 an ounce in 1970 to $850 per ounce in 1980. For new gold investors, this is a great opportunity, but it’s important to avoid making certain mistakes.
1. Excess Buying
There’s such a thing as too much gold. You need to have a balanced portfolio that is appropriately diversified. Just because gold is likely to go up, doesn’t mean you should bet the farm on gold. Even during gold’s record run in the 1970s, gold experienced market corrections. In those moments, you will need other assets that have a low correlation to gold, particularly equities, to counteract any corrections. Diversification is absolutely necessary to reduce risk. Investors are advised to start off with an exposure of some 5% to 10% of their portfolios, before adjusting to reflect the market and diversification needs.
You should never be a gold-at-any-price investor. It’s important to buy when an asset is cheap, to give yourself a margin of safety and to leave room for alpha. A good indicator of gold’s valuation is the Dow Jones Index/Gold ratio. The higher it is, the more undervalued gold is. Typically, a high ratio is followed by higher gold prices.
You want to invest in gold when the ratio is high, which it is right now, and not when it’s low. The lower it is, the more likely gold is to decline in price.
Gold investors also overpay when buying physical gold by paying a large premium on the spot price. The retail price of gold should be around 2% and 5% above the spot price.
3. Not Considering Non-Physical Gold
Gold can be bought in a variety of ways. You can invest in physical gold, but investors should also consider investing in gold exchange-traded funds (ETFs), gold stocks, a Gold IRA Company.
4. Investing Excessively in Rare Gold Coins
When people think of gold, they tend to think in terms of gold bullion, gold coin and gold jewelry. Rare gold coins are especially popular with those who want to invest in physical gold. Although the allure of rare coins may be hard to resist, investors should be aware that gold coins are relatively illiquid. There are just not enough people who invest in rare gold coins for you to be able to sell them easily. So, if you are going to get coins, then get well known coins such as Krugerrands, American Eagles and other government coins that have a wider market. You can buy government coins through accredited dealers.
5. Not Using a Secure Storage Company
Not only is it important to use accredited dealers when buying gold, investors should also ensure that they use secure storage companies. You want a company with a deep history and an excellent reputation. You can speak with the state securities commissioner to see if that company has any negative regulatory history.