Are you thinking about making a gold investment? If so, now might be the time to do so as gold prices have taken a turn for the better, and there are a number of sectors in the market that are fluctuating. As prices in gold continue to rise, there is no harm in spending the time researching a few gold investment companies.
It is worth noting that, along with buying physical gold or purchasing the stocks of companies who mine the metal, investors can make a gold investment through gold ETFs, such as the SPDR Gold Trust ($GLD). To prepare prospective investors for the road ahead, here is a list of the top illusions surrounding the gold and silver market – and why they aren’t true.
Illusion Number 1: Precious metal prices are negatively affected by rising interest rates.
Those with knowledge of the market tend to be surprised that this illusion is still around, as both gold and silver had one of their best runs during a period of rising interest rates. This happened in the late 1970’s as bond yields climbed into the double digits.
Currently, there are analysts who want to invoke the Federal Reserve rate hikes as a reason to avoid investing in precious metals. However, it has not been confirmed whether the Federal Reserve will follow through. That said, nominal interest rates will not determine whether precious metals such as gold or silver, are more or less attractive in comparison to interest-bearing debt tools.
What matters in this sector is whether real-time interests rates are positive or negative. Negative real interest rates, for instance, are more beneficial for precious metals. Negative interest rates occur when rates are falling behind the inflation rate. All in all, interest rates could increase at the same time that precious metal prices rise, however, so long as rate hikes stay behind the curve, gold and silver will lead the pack.
Illusion Number 2: In the 1930’s, the government raided safety deposit boxes and seized gold.
As a result of President Roosevelt’s Executive Order 6102, this illusion is still very prominent in today’s society. Yes, President Franklin Delano Roosevelt did execute an order that banned “hoarding” chunks of gold and yes, the citizens of America were required to give up their chunks of gold in exchange for cash. But, Roosevelt’s 1933 order depended entirely on voluntary agreement. This directive did not allow the government to go into someone’s safety deposit box and confiscate all of their gold.
There were those involved in gold investing who had purchased gold bullions and then had them seized, but this was mostly due to bank failures. The actual gold confiscation only took place on a small scale. In the 1930’s, if an investor had their gold in a safety box at home, many just ignored the president’s order. This makes sense for back then as the government was not able to keep an eye on every individual bullion owner, but, don’t forget that the government still isn’t able to do that today either, so long as you purchase your metal directly from a dealer.
Despite the government claiming to have the authority to seize private assets during a national crisis, it is very unlikely that the government will demand another sweep of citizen’s private gold. This, of course, is because the gold standard no longer exists, so the constraint of gold backing does not limit the act of issuing more dollars.
Illusion Number 3: Numismatic coins are not allowed to be confiscated.
This illusion is passed on from rare coin dealer to rare coin dealer. Typically, these dealers will sell extremely marked-up collectible coins that are made from precious metals, such as gold or silver, and they will sell them under a false pretext. As mentioned, it is very unlikely that any type of gold coin will be seized, plus there is no law which exempts collectible coins from a future order that does not allow the ownership of gold.
If you are looking to make a gold investment and you are leaning towards gold coins, but you’re worried about them being confiscated, here’s some gold investing advice: opt for the U.S Mint’s American Eagles. These coins are thought to be legal tender coins in the United States, therefore they have some form of legal barrier to any potential order that prohibits gold ownership. Plus, premiums on Gold Eagles are only slightly higher in comparison to other bullion coins. Numismatic coins, on the other hand, have premiums that can be multiples of the actual value of the metal. Additionally, those who have made this gold investment are at risk of only getting a fraction of that money back when they sell, if collectors no longer consider the coin to be as valuable as they once were.
Illusion Number 4: Gold mining stocks are better than gold bullion.
Gold bullion have proven to be less risky and more rewarding, and contrary to popular belief, investors in the past have prospered more with gold bullion than with gold mining stocks.
Gold gained 309% from the year 2000 through to 2014. During the same period, HUI gold stocks index only gained 122%. Additionally, when gold prices decreased in the 1990’s, gold mining stocks decreased even further.
That said, when gold mining stocks are doing well, they can potentially deliver more gains in comparison to gold bullion. Just keep in mind however that, when gold mining stocks perform poorly, gold and silver mining stocks will suffer more than gold bullion. Generally speaking, gold mining stocks deliver when looking at short-term time frames.
If you are looking for gold investing advice, remember the following: gold mining stocks can appear attractive at certain times for traders or those just speculating, but they are not the best option for those looking to buy and hold.
Illusion Number 5: Gold is subject to price manipulation.
Price manipulation does occur, but it occurs in a number of asset markets and not just the gold market. As of late, there have been numerous scandals of companies rigging interest rates. Sadly, no market is safe from the manipulation of price.
Like anything, investors in this sector have different opinions on price manipulation. The Gold Anti-Trust Action Committee, for example, claims that price manipulation is created by the United States Treasury Department and Federal Reserve so they are able to artificially suppress prices of gold and silver. On the other hand, there are investors who very much doubt that price manipulation reaches past a couple traders who don’t care about the direction that metal prices are heading in.
Overall, the takeaway is this: price manipulation will make purchasing precious metals unattractive, but only if prices are purposefully being set artificially high. If, however, they are set artificially low, buyers should consider it a gift.
For those wanting to make a gold investment, know that hard assets are based on the rules of supply and demand. Industrial users of precious metals and investors in coins, for instance, will require a physical product. It is important to note that when the demand for physical metal uses up available supply, the prices in the physical market will have to go up. If you are looking to start gold investing, know that owning the metal and not participating in futures markets is the safest route to take.
Featured Image: depositphotos/Inokos
