Gold as an investment

Gold as an investment is almost as old as mankind itself. The precious metal was already used as a means of payment in ancient times.

In order to understand the cultural significance and fascination of gold, however, it is not even necessary to go on an excursion into high culture, but rather to take a look at the colloquial language, in which not all that glitters is gold, the morning hour has gold in its mouth, or golden ages dawn. Even children are taught the meaning of gold when the comic Dagobert Duck baths in coins made of the precious metal. But what about gold as an investment these days?

An intensive examination of this question leads to an ambivalent picture.

History of gold as a financial investment

The history of gold has been written and told hundreds of times. Seafarers like Columbus or Magellan sailed across the oceans only because of the prospect of gold and had their projects financed in gold. The investment had been worthwhile, because from the Renaissance onwards the precious metal was shipped in rough quantities from South America to Spain and Portugal, where still today magnificent churches and palaces bear witness to the wealth of that time.

In the USA again the “gold rush” has become a fixed term. In California it was 1849, on the Klondike River in Alaska in 1897, when a regular army of gold seekers set off to extract the noble substance from the ground.

Meanwhile gold is found only about 4,000 meters underground and modern gold prospectors work mechanically. It should be noted that production has fallen in recent decades and demand has risen. From this point of view, gold makes sense as a financial investment, especially as it can also be processed into jewellery or used as coin gold.

Gold as a financial investment is held in private hands in Germany alone with about 1,400 tons and the gold reserves of the Federal Republic amount to about 3,381 tons. The relevance is therefore there through and through.

How can gold be used as an investment?

Gold as an investment can be bought in refineries or exchange offices. The precious metal is traded at the respective daily rate, which can be subject to considerable fluctuations. In September 2019, 100 grams in bar form cost a round 4,450 euros and fits perfectly in your trouser pocket. If you have your “pockets full of gold”, you can easily carry a fortune of up to one million euros with you or deposit it in a safe place.

Gold as a financial investment differs in this respect from almost all other forms of investment because it can be stored without outside help, the existence of a bank account or Internet account. Furthermore, gold can be transported as an investment and is valid everywhere. There is therefore no need for a willing buyer, as is the case with other material assets, but it is bought and sold worldwide at uniform rates.

Of course, the storage of gold also entails a risk, for example through burglary, which does not exist with investments in a bank. The possession of gold cannot be sufficiently insured, so that physical gold in the form of bars and coins is in fact rather something for lovers. As an addition to an otherwise differently structured portfolio, however, this form of investment is definitely suitable.

Alternatively, gold can also be used as a financial investment in the form of equity funds or index certificates on the gold price. In this case, either shares are bought from gold-producing and processing companies or the current gold price is immediately replicated in the form of an index. The advantage is obvious, because nobody has to “struggle” with physical gold and enjoys the advantages of a digital settlement.

In the event of a crisis, however, availability is limited and there is always the possibility of subsequent taxation. At present, however, gold is tax-free to acquire, which is a difference to all other precious metals such as silver or platinum.

Advantages and disadvantages of gold as a financial investment

The advantages and disadvantages of gold as a financial investment can thus be clearly identified, and in some cases even exist in one and the same fact. Gold is safe because it has always been a means of payment and is accepted throughout the world. If you carry a gold coin with you, you can immediately convert it into cash in the USA as well as in Australia, Nigeria, Spain etc.

The exchange rate should be largely identical, the settlement is always fast and problem-free. However, the same gold coin can also be lost and is not insured in any way. In addition, the possession of visible gold arouses desire and should not be hung “on the big bell”. This risk can be minimised by buying gold in the form of ETFs or funds, which then delays and complicates settlement.

A major disadvantage can be the enormous fluctuations in the price of gold. Although this has almost only risen for decades, there have always been times when this was not the case. Those who then have to sell in order to create liquidity must reckon with disadvantages.

Another aspect that should be regarded as a disadvantage of gold rather than an investment is the complete lack of dividends. You can buy and sell gold but it does not earn money and does not provide a passive income. As beautiful as the metal is, it is in some ways dead capital, whose value only increases through price increases.

One aspect that has gained in importance, especially in recent years, is that of sustainability and environmental protection. Those who value ethical investments are not well advised to use gold as a financial investment.

When gold is mined industrially, the industry works with both mercury and cyanide and thus with highly toxic substances. These substances are released into the environment in large quantities, because around 150 tonnes of cyanide are required to remove one tonne of gold from the lattice structure of a rock. For humans, even a few millilitres are absolutely fatal.

In addition, gold mining consumes enormous amounts of water and contaminates entire landscapes. Among other things, this happens in the rainforest, which is so important for the world’s climate. Environmentalists assume that only a gold ring ensures that around 20 tons of toxic waste are produced.

It is difficult to get “clean” gold as an investment, and even the certifications and seals are not always valid. It is therefore difficult to make an ethical investment in gold.

Alternatives to gold as a financial investment

Fortunately, there are a number of alternatives to gold as an investment. For example, if you want to play it safe, you can opt for a fixed-term deposit or life insurance. However, both have the disadvantage that the interest rate is infinitesimally low and thus money is lost at the end of the day.

Equities and index funds or ETFs offer further alternatives. This form of investment offers enormous leeway, because ultimately it can be decided individually which company should receive money and which should not. Ecological or ethical criteria can be easily included.

Anyone who wants to participate directly in the success of a company or project prefers crowd investing to gold as a financial investment. Specifically, a certain amount is invested as a subordinated loan in a project described in detail above or given to a company to manage. In contrast to gold as a financial investment, the interest rate is fixed in advance and the return is paid out regularly.

In crowd investing, the money works, which can consist, for example, in an entrepreneurial activity or – in the case of ship investments – in driving the ship and transporting goods. Crowdinvesting thus creates or secures jobs and the investment leads to concrete action.

Gold as an investment may seem attractive at first glance, but there are some pitfalls that you should be aware of. If you don’t want to do without the precious metal, you should consider buying used jewellery or recycled gold. It may not be possible to generate such high yields as with pure gold, but at the same time one acquires something beautiful and useful that can be inherited.