Good Morning DINKS. We recently published a post about the fluctuations in the price of gold and how commodities affect our economy (or vice versa). I want to follow up on this post and discuss a little bit in more details about the risks of investing in gold and other commodities. Investing in gold, silver, and oil seems to be a hot investment topic right now, and as a financial professional I continuously see investors making the same mistakes when it comes to investing in gold. I would love to know what you think about gold – do you invest in gold bullion, do you own gold bars, or do you invest in gold mining companies?
As a financial professional I personally can’t stand it when clients come into our bank branch and want to invest in gold because their neighbour, their cousin, or their dentist told them that it was a good investment. Do you remember my client who wanted to sell his life savings and invest in gold based on the advice of his classmate? The first rule about investing is that it is a personal choice. Just because your neighbour made money by investing in gold doesn’t necessarily mean that you will too.
Not everyone makes money in gold
By the time you hear about a “must buy” investment the odds are that it’s probably too late for you to make a huge profit. People who invest in gold, or other commodities such as oil, are hoping to make a capital gain on their investment. This means that they want to sell it at a much higher price than they paid for it. If people are telling you that “you must buy” gold then the secret is already out and the price of the commodity is already high. This is not to say that you won’t make money if you purchase gold or gold related investments (aka gold mining companies), but you definitely won’t make as much money as someone who bought gold before the boom.
In a very general nutshell investors can make money in one of three ways: they can earn interest on low risk fixed income investments, they can earn dividends on stock and mutual fund investments, or they can earn capital gains on higher risk investment such as commodities and investing in individual sectors. If you purchase gold at a high price per ounce you may make some profit, but you won’t make a lot of profit. The key to making money on capital gains is to buy low and sell high, but if everyone is talking about a particular type of investment the odds are that the price is already high.
Don’t kid yourself, gold is a high risk investment
Some investors may be looking for growth oriented investments in their investment or retirement portfolios. Some investors chose to purchase foreign or domestic stocks, some investors choose to invest in equity mutual funds, and some investors chose to invest in commodities, some chose to invest in individual sectors of the economy such as health care or technology, and some investors chose to purchase precious metals.
Regardless of which type of high risk investment you choose you should make an informed decision. Research the past performance of the investment and decide if you are comfortable with the highs and lows over the past year. High risk investments can offer a high potential profit, but they can also have a big potential loss. You have to be willing to take the risk for the possibility at the reward when purchasing in high risk investments.
Do you invest in gold?
Photo by santanartist