What Makes Gold So Valuable?

Why do people invest in gold? And what makes the hunk of metal so valuable anyway?

Do you hold gold in your investment portfolio? Why?

Introduction to Commodities - MoneyWeek Investment Tutorials

Out of all the asset classes to invest in, commodities are considered one of the most solid ways to hedge your risk in case of a serious economic downturn. Do you understand how these assets move in relation to the wider market of stocks and FOREX? It pays to understand the key relationships between them and how they can be used to protect your net worth!

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Should You Invest in Gold or Silver?

Gold prices-the price per ounce of bullion or of coins, such as Kruggerand or American Eagle gold coins-have shot up in the past several years. Silver prices have followed suit (see the current price of silver, for example). If you listen to commercials or read advertisements, prices can only go up.

That means 2017 is a great time for investing in silver or gold, right? Not necessarily.

Investing in Silver; Investing in Gold

People invest in gold and silver for two primary reasons. First, they might hope that prices will continue to increase (desire to gain money). Otherwise, they believe that other investments will decrease in value (desire not to lose money). Yet how do you know when either will happen?

Gold and silver both have practical uses. A lump of precious metal is often pretty. You can admire it. You can make it into jewelry. You can use it as a component in certain industrial processes.

Beyond that, a gold coin sits on your shelf and collects dust. Any value it gains is independent of its existence. It's just a coin. Due to circumstances outside of your control it could be gaining value now-or it could be losing value.

Compare that to a business. Any good business worth owning will make you money. Even a lemonade stand that costs you $100 to start and makes you $125 every summer produces $25 in profit the first year. Every year you keep running the business, it produces more money. Remember that the money a business produces is the most important metric of success.

At any point you can take your profit, as the owner of that lemonade stand. You can pay yourself a dividend. You can invest back in the business, to serve more customers or build more lemonade stands. You can do a lot with the cash that business generates.

Every year, your gold or silver coin sits on the shelf and collects dust. There's little you yourself can do to affect its price.

Are Precious Metals Good Investments?

Why do people invest in gold? What's the point?

Is buying gold risky? Depending on your appetite for risk, sometimes it can make sense. Precious metals like gold and silver and platinum tend to move in directions opposite of the market. If there's a market drop (like in 2008), gold prices tend to rise. You can't count on that happening, but diversifying your investments into classes like stocks, bonds, and commodities can help you avoid losing everything.

Gold and silver prices can continue to increase. They may get more valuable because they get more scarce-mining and refining might produce far less gold or silver one year-but by the same token, they might lose value because the get more common, too. Can you predict that?

Gold and silver prices might increase because demand increases. More people want to buy them. (That's probably why there are so many advertisements to buy gold or silver!) Then again, demand might decrease. Can you predict that?

Maybe they'll do neither. Maybe they'll hold their value. Maybe $1000 in gold bullion today will be worth about $1000 in gold bullion in five years, and you'll only have lost inflation. That's better than losing everything, right?

Meanwhile, all of those great businesses worth owning make real money every year. This profit gets returns to investors as dividends or stock buybacks or other investments to make even more money in the future.

Meanwhile, what's the market for your Kruggerand? It's not as easy to sell as a share of gold. 

You need to have someone evaluate its condition and then find a buyer willing to negotiate with you for some fraction of what it might be worth. You could melt it down for its value as a fixed amount of gold, but that's illegal for many currencies and you won't necessarily get the full value of the coin.

How Do You Sell Gold?

If you do own gold and want to turn it back into cash, how can you do that? How easy is that? Or what if there's no cash available? How are you going to trade a bar of bullion for a deer carcass and some hunting rifle

This is how men make wealth by knowing the future trends. More on this gold market in my next article.

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Buying Into Bitcoins

With the 21st century demand for quick and big profits, one of the most controversial new investment vehicles has been Bitcoins, the virtual currency. It's gained controversy partly because of its volatility, partly through the instability of Bitcoin exchanges and partly because their in-traceability meant they were a favored payment method for criminals.

Things are changing and after a particularly volatile spell in which one of the main exchanges, MtGox, filed for bankruptcy, the currency seems to have settled into a more stable pattern allowing investors to be able to take a measured view of whether to risk their money in a currency that technically doesn't exist.

Volatility

Although Bitcoins are becoming increasingly popular, the market is still quite small, meaning that good and bad news can have a disproportionate effect on the price. The long term outlook for Bitcoins is potentially good, meaning that the upside on price is stronger than the potential for a decline over the long term. Most brokers recommend that you consider Bitcoin a medium to long term investment because of its volatility. Think of it in terms of real estate. No one buys and sells houses many times a day and there can be significant drops in property prices but the long term trend for property prices is usually up. The same can be said for Bitcoins. Whilst there is a significant daily trade in the currency, many Bitcoins are held as investments as analysts believe that it's likely the price of Bitcoins will rise long term because they are becoming more widely accepted.

Influencers

As with all financial instruments, prices are influenced by supply and demand. Bitcoins are no different but what has caused big fluctuations in price has been the unusual nature of the news that influenced the supply and demand:

• The bankruptcy of MtGox, one of the biggest Bitcoin exchanges

• The closing down of Silk Road which allegedly accepted Bitcoins for drug trading

• The disclosure by the US government that, despite the negative uses of Bitcoins, they believed that the currency had a future

• The media has also stirred up interest by reporting on milestones in the currency's rise and fall, trumpeting the rise to over $1000 and its subsequent plummet on bad publicity.

Generally the advice on investing in Bitcoins is to sit and watch the market for a couple of weeks to get an idea of how the currency trades, its volatility and trends. It's difficult to find rumor that hasn't instantly affected the value, so many suggest investing a small amount and simply watching for opportunities, a little like setting take profit levels with shares and Forex, you can do the same on Bitcoins; it's just a bit longer process and a little less automated.

Just like with any investment, the value can fall, and events like the collapse of MtGox and the closing down of Silk Road, negatively affected Bitcoins; not just because demand was reduced but also because Bitcoins were falsely linked with the companies by urban myth. The market seems to be becoming more regular, but not necessarily regulated, as more exchanges come online. Some of the exchanges will go the same way as MtGox but others will consolidate and become stronger and more reliable. No doubt official regulation will be applied to Bitcoins in due course at which time the volatility is likely to reduce.

Bitcoins represent an exciting and potentially lucrative medium to long term investment vehicle. Exciting because it hasn't yet been accepted into the mainstream of currencies or investment vehicles. One thing investors like about Bitcoins is their conviction to prospects as was in gold.

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