Investing in gold in 2022 – everything you need to know
Investing in gold is not the exclusive domain of long-term investors, who keep some of their fortunes in it for years. The metal is also of interest to traders who want to take advantage of changes in its price in the short term. Also note that in both groups there are different people, for example the level of investment knowledge or financial capabilities.
The above issues are important because it is difficult to write an article that would interest any potential investor in the Polish zloty. Therefore, treat our study as a comprehensive article on what you need to know to consciously invest in gold. The first chapter, devoted to the properties of the mineral, is theoretical in nature, while the next chapter focuses on practical issues related to investment. We encourage you to read the entire article, but you can focus on certain parts that interest you.
The properties and appearance of gold
Gold is no longer part of the monetary system, but it still plays a very important role in the financial world. Currently, it does not support any currency (although it is likely that it will be tied to it in the future), and it is also not widely used for payments, but it is of interest to many investors. In a sense, this interest has persisted for several millennia, due to the unique properties of ore, as well as due to its limited and limited resources.
Gold is rarely found in nature, and at the same time it is durable, malleable and malleable, so it can be easily divided and given any shape. In addition, it does not tarnish or oxidize in water or air. Raw is practically indestructible, and the only substances that can “harm” are: cyanide solution and aqua regia (a mixture of hydrochloric and nitric acids). It is no wonder, then, that it is one of the oldest methods of capital investment, and it is also one of the first minerals that man began to use as a means of payment.
Until today, only less than 200 thousand. Tons of gold and its remaining underground resources are estimated at 50-60 thousand. Ringtone, ring. If the current average rate of production is maintained and no new large deposits are discovered in the meantime, all “recoverable” gold will be exhausted within 20-30 years.
Gold as the basis of the monetary system
The importance of gold in the past is evidenced by the fact that in the seventies of the eighteenth century it was decided to build the work of the international monetary system on it. Ore was rare, permanent, easily divisible, and widely accepted, making it a global currency and standard for currencies.
In the gold coinage system that lasted until the outbreak of World War I, standard units of money were equivalent to a certain weight of gold. Moreover, central banks held the reserves of this metal, as well as the convertible currencies into it, in a fixed ratio to the amount of money issued. At the same time, they guaranteed the exchange of money for gold, according to the established parity.
More countries began to deviate from the gold standard in different years, many after the outbreak of the Great Economic Crisis in 1929. As a result, they were able to pursue an expansionary fiscal and monetary policy, which allowed them to increase domestic demand and release unused production capacity. In other words, giving up gold convertibility allowed governments and central banks to “print” any amount of money freely, which helped limit the negative effects of the crisis.
The end of the old monetary system – the beginning of investing in gold
For many years, the price of gold was determined from top to bottom and reached several tens of dollars per ounce. In 1933, when President Roosevelt called for Americans to convert into mandatory dollars, the price was $20 an ounce of gold. Later, there was a revaluation of the metal and the price jumped to nearly $35. It remained at this level or slightly higher until the early 1970s.
At the time, only central banks were allowed to exchange gold for dollars, and citizens of the United States or communist countries could not even own investment gold (formally at least). This changed in August 1971, when President Nixon abolished the aforementioned convertibility, with many important consequences for the whole world in principle. This meant, inter alia, the end of the monetary system based on gold, the release of the gold price, and the beginning of free money creation by central banks, which led to the intensification of inflationary processes at that time.
After the possibility of converting gold into dollars was abolished, the availability of gold to American citizens (and not only) began to gradually increase. However, the law legalizing the possession of gold coins or bullion in the United States was only introduced at the end of 1974.
Knowledge of the above issues is necessary, among others, to be able to understand the importance of gold and correctly interpret its price charts. The above decisions led to a sharp increase in the price of gold (more on this later), as well as a change in the perception of its role. Although gold has always been a sought-after commodity, the 1970s was a breakthrough for him. The rapid growth of the metal’s price and the intensification of inflationary processes meant that ore was widely seen as a good way to store the value of money over time.
Investing in gold – risk, potential profit and time horizon
It’s time to move on to more practical and important issues in the context of investing in gold itself. Let’s start with the fact that many people attribute to it relatively low risk and potentially medium profit, and we assume that it is best suited for a long-term investment horizon. In practice, both of these popular opinions can be challenged, with the first two seeming to be the most controversial.
To capture the actual risk and profit potential of investing in gold, look at the 100-year chart of the price of gold against the US dollar. This will make it easier for you to judge what kind of income or loss you can expect at different time horizons.
The chart above illustrates well how much gold was affected by the 1971 decision to end the convertibility of gold into dollars. Given the impressive increase in prices over the next ten years, it is difficult to conclude that the metal has a low profit potential. In that period, it increased more than 20 times (from about $35 to more than $700), which was the result of, among other things, President Nixon’s aforementioned decision, but also strongly rising inflation. So, let’s stress it was an exceptionally fitting time for metal. Today it is difficult to imagine that it will again register a strong and rapid increase in value again.
In the early 1980s, gold temporarily cost more than $800 an ounce (this peak is not visible on the monthly chart above), but it was also the end of its power at the time. The impressive boom ended with a sharp increase in interest rates (the US Federal Reserve raised them to 20%!), which was to help fight inflation. It is clear that inflationary processes weakened over time, but interest rates continued to rise, which led to a decrease in the value of gold. As a result, the price of bullion fell more than 60% in 5 years, and it took 28 years to establish a new peak!
Looking at the behavior of gold price in the 1970s and after the bubble burst in 1980, it is difficult to describe it as a safe asset with low or even medium profit potential. These periods also prove that it does not necessarily turn out to be a good long-term investment – history shows that periods of deflation and sideways movements in gold prices can last for many years.
The part above was not intended to discourage you from investing, but to show that even so-called safe havens, which include gold, should be approached with caution. Here, too, it is important to enter and exit the market in time, for which you need, among other things, to understand economic phenomena and their dependencies, as well as orientation in the global economic situation. However, if you are thinking of buying gold for 10, 15 or 20 years, and you will buy it regularly (eg once every six months or a year), you will significantly reduce the investment risk. In practice, in many cases this is (and should be) an investment in gold.
Below is a short term gold price chart that will help you understand why gold is considered a relatively low risk investment with low to medium profit potential.
As you can see, if we take into account the shorter period and daily price fluctuations, gold will defend its position as a relatively stable asset. From October 2019 to October 2021, its price fluctuated in the range from about $1,450 to roughly $2,050, and the vast majority of the time – from $1,550 to $1,950. On the other hand, the highest daily price changes, excluding single sessions, were only about 4%. Therefore, one might be inclined to say that gold is more stable than industrial raw materials or stock exchanges, for example. In periods of panic or excitement, the market records lower price changes than global powers like Apple , Coca-Cola, or McDonald’s .
How to invest in gold? Available capabilities and features
If you think that gold will protect your capital well from inflation or you want to speculate on changes in its price in a shorter period of time, then you should choose the form of investment “zloty” that is right for you. You have a lot of options at your disposal, each with different characteristics and they work well in other situations. Therefore, it is important to understand its essence well and familiarize yourself with the pros and cons. The main dilemma that you have to solve is to invest in physical gold or one of its “paper” versions.
Gold jewelry and coins are not a good way to invest in physical gold. Rings, earrings, or bracelets must be rejected because of the value-added tax, the difficulty of subsequent resale, and the fact that, among other things, the work of a jeweler for which the price of the gold in it is higher than the price of “pure gold”. On the other hand, collecting coins have the drawback that they require specialized knowledge, and their value is affected by factors unrelated to the gold itself, for example the degree of rarity, trading volume or current coinage trends .
Investing gold, that is, gold bars, bullion coins
For many people, the first choice is to invest in physical gold, that is, gold bars or coins. These products are called investment gold and have the advantage that they contain almost exclusively gold. Additionally, they do not show any collector’s worth or greater aesthetic value. Therefore, its price depends mainly on the amount of gold in it and its current price in the market. All this makes it ideal for strictly investing purposes, and more specifically – for long-term storage of property in gold.
Gold bars and coins offer almost the same benefits, so it doesn’t matter which one you invest in. However, it is important to choose products from reputable manufacturers that are valued by investors and are willingly purchased. Most importantly, the coins must be in good technical condition, and the bars – additionally be in protective certificate packaging, which confirms their authenticity.
It is a good idea to buy mint bars such as Valcambi, Heraeus, Umicore or Perth Mint, but Mint of Poland products would also be a good choice. In the case of bullion coins, it is worth investing in the so-called Big Five, ie: the South African Krugerand, the American Eagle, the Vienna Philharmonic, the Maple Leaf or the Australian Kangaroo. When it comes time to cash your investment in gold, you can easily sell any of these products at a fair price.
Keep in mind that bars and coins differ not only in appearance, but also in weight parameters. The first weighs 1 to 1,000 grams, and single mints usually offer bars of 10 or 11 standard: 1, 2, 5, 10, 20, 31.1 (1 troy ounce), 50, 100, 250, 500 and 1000 grams . On the other hand, gold bullion coins are mainly one ounce products, although you can easily find those that weigh 1/2, 1/4, 1/10 and even 1/25 ounce in the market.
Taking into account the current prices of gold (as of October 2021), you will pay less than PLN 300 for the cheapest 1 gram piece, and for the cheapest 1/25 ounce coin, just over PLN 350.
Paper gold, i.e. ETFs and other instruments that display gold prices
Instead of buying the metal in its physical form, you can invest in a financial instrument that allows you to make money from changes in the price of the metal. All you need is a suitable brokerage or forex account, and the whole process is not much different from the transactions made on the exchange.
If you want your “paper” investment in gold to be medium or long term (no more than several years), a reasonable solution would be to buy ETFs that are fully secured in bullion, eg ZKB Gold ETF, Sprott Physical Gold Trust or WisdomTree Physical Gold . In this case, you are dealing with chests that actually buy bullion bars and coins, and also allow you to order physical gold. In practice, the concession applies only to wealthy investors, because the ETF will not pay out 10, 20 or 50 grams of money.
You can also select an ETF that simulates changes in the market price of gold, but is usually only partially secured with a physical ore (instruments that are not hedged at all, often confused with ETFs, stock exchanges, i.e. ETNs ). -y). Such a fund has a lower management fee than a fully guaranteed fund, but for obvious reasons, a slightly higher risk should also be assigned to it.
You also have futures contracts at your disposal, and above all CFDs (for exchange rate differences) on gold, which also does not involve the purchase of physical gold, but allows you to earn on changes in its price. Moreover, it gives the opportunity to play on both increases and decreases in the gold exchange rate, as well as the use of leverage (similar possibilities can be provided by the mentioned ETNs). Most often, they are used by short-term traders, including day traders, who open and close market positions on the same day.
You can also invest in the ore by buying shares in a selected gold-producing or mining company. However, keep in mind that while their prices move in the same direction as metal prices, they are much more dynamic. So an interesting alternative might be to buy ETFs on shares of several companies related to the gold market, which are characterized by lower volatility in value and lower investment risk.
Investing in gold or “paper” gold – which one to choose and why?
You may already be able to determine if buying physical gold would be a better solution for you or one that gives you exposure to changes in the bullion price. However, before you finally decide on a particular option, analyze the main advantages and disadvantages of each of them.
Investing in Gold – Advantages and Disadvantages of Bullion and Coins
The main advantage of investing in gold is the fact that it allows you to use all the physical properties of gold. It has high durability, is easily transportable, and you can easily drain it in any part of the world. In addition, you can keep coins or bars out of the system; You store it where you want it without having to worry too much about the actions of the government or financial institutions. However, let’s add right away that currently in Poland you can buy gold anonymously for up to 15,000 PLN. EUR (the limit in Germany is only 2,000 EUR). This provision can be circumvented (we won’t tell you how), but its presence is a clear indication that governments want to know about the “zloty” assets of citizens.
Investment gold also has a very significant advantage in terms of tax aspects. According to the regulations and interpretations of tax offices, it may not be considered a form of investment, but a tax-exempt method of storing property. However, in order to avoid paying the tax, a gold bar or coin must be sold no earlier than six months after its purchase.
However, there are three very serious disadvantages of physical gold. The first is the need to store ore, which in most cases leads to additional costs; If you want to feel safe, you usually have to buy a safe or rent a safety deposit box. The second inconvenience is a certain problematic nature of the purchase transaction itself (comparing offers, assessing the authenticity of the gold) and the subsequent resale of ore (issuing an offer to sell, finding a buyer). The third drawback is the fact that it is profitable to buy gold only with a sufficiently large mass, preferably at least 1 ounce (31.1 g), which is currently associated with an expense of approximately 7-8 thousand zlotys. Zloty. For bars and lighter coins, the margin can be as high as 10-15%, so you’ll be paying a lot more for every gram of gold.
Or perhaps an investment in “paper” gold?
In the case of “paper” gold, the advantages and disadvantages differ slightly depending on the tool made of gold. So let’s focus on the pros and cons that they have in common, and at the same time distinguish them from physical gold.
The advantages of gold-based instruments include the ease of completing transactions, as well as the absence of storage related issues and costs (however, there are transaction fees and possibly account fees). With their help, active investors can freely use various investment strategies and respond flexibly to the changing market situation. Moreover, paper gold allows you to easily enter the market with little capital and in the same conditions that wealthy investors can count on – there are no production margins that would reduce the profitability of low-value investments.
The main drawback of paper gold is the fact that it does not allow you to use the physical properties of the ore, and this has other drawbacks, including the lack of complete control over the investment or the complete lack of anonymity. Here comes the risks of the broker, the stock market and the banking system. In addition, the functioning of the market requires a technical and organizational infrastructure. You can only trade this gold under certain conditions, through special investment platforms. Moreover, it is treated like any other investment in the stock exchange and is therefore tied to the obligation to pay the 19% capital gains tax.
The rest of the text will refer to physical and “paper” gold, but were purchased with a longer investment horizon in mind. In a few weeks or months, we are dealing with purely speculation, which is of no interest to us in this text. However, if you are interested in that, see the ranking below and choose the best place to trade gold-based instruments.
Gwarancja w razie bankructwa
Investing in practice: why and when to invest in gold?
You already know how you can invest in gold, the risks associated with it and how much gold you have been allowed to earn in the past. Therefore, it remains to think about the best time to start investing “zlotys”. To answer this question, we will again consider the historical price of gold, and also refer to the behavior of the stock exchange and some economic phenomena.
When is gold more expensive and when is it cheaper?
Gold should be a profitable investment during financial crisis and stock market downturn, but it will not yield satisfactory profits in times of economic boom. Simply put, when the economy is in good shape, capital flows into risky assets, such as stocks, while in bad times it is diverted, for example to gold, which many people still consider as a financial safe haven.
Let’s add, however, that gold price behavior is also influenced by inflation and interest rates. When we are dealing with positive real interest rates (hard to imagine nowadays), you can easily protect yourself from inflation, for example by using safe bank deposits. It is not a good time to invest in gold, and in general also in stocks and other risky assets. After all, why would you risk losing part of your capital, when a bank can provide a sure and satisfactory profit?
The aforementioned regularity is confirmed by historical quotes of gold prices expressed in US dollars.
As you can see, 1980-2001 was a time of a major bear market with few major upward moves. As mentioned earlier, the main reason was the fact that in that period we were dealing with high interest rates and, at the same time, low inflation. However, let us add that for a previous decade, crude grew more expensive (due to strong inflationary processes), and at the end of the seventies recorded a rise in parabola prices. Sooner or later, this “bubble” had to burst – and it did.
A good investment for tough times
After the hole broke in 2001, gold entered another big boom that lasted for more than 10 years and increased in value by more than 8-fold. The strong rise in the price occurred at a time of low interest rates, but at the same time also with a relatively low rate of inflation.
So where did the impressive increases come from? Well, in that decade, many negative events of global significance took place. He spoke here, among other things, about the beginning of many years of wars in Afghanistan and Iraq, numerous terrorist attacks in Western European countries, as well as the bursting of the US real estate bubble and the consequent global financial crisis. The latter was the most important and contributed to the 2.5-fold increase in the price of gold in less than 3 years. Later, as the global economic situation continued to improve and stock markets (particularly in the US) started posting strong gains, gold experienced a strong decline followed by a period of recession for several years.
During these times of crisis, the value of gold has grown, cementing its position as an asset worth holding in times of political and social turmoil, as well as economic and financial turmoil. It was similar in 2020, when, among other things, due to concerns about the outbreak of the Corona virus pandemic, the price of gold rose by about 30% in just six months. However, let’s add that it was a time of record rate cuts and a massive reprint of money, when other assets, especially stocks, were also doing well.
Simply put, during that particular period, some people bought stocks anticipating the recovery of companies and economies, and others invested in gold, fearing hard times and/or high inflation caused by expansionary fiscal and monetary measures. The outlook for the future was mixed, but in short, prices were rising in both markets.
The outbreak of the epidemic and the collapse of the gold market
In March 2020, when the massive panic related to the outbreak of the epidemic crept into the financial markets, gold also began to retreat strongly. Kruszec lost more than 10% of its value in two weeks, but it is worth noting that, firstly, it was the fastest decline in nearly 40 years, and secondly, one of the lowest levels among all investment assets.
Why did gold fall when it is considered a “safe haven”? There are many theories, but it appears that investors (including institutions) have been selling the metal simply because they were afraid and didn’t know what was coming. Many were looking for liquidity, some wanted to wait for the unstable time “cash”, and the brave turned to heavily discounted stocks. Most importantly, the drops turned out to be short-lived, and after a few weeks the raw began to strengthen significantly. Let’s add that we dealt with very similar behavior to the gold market during the 2008 global crisis.
Investing in gold in 2021 – why disappoint despite high inflation?
Many investors, especially beginners, were surprised that investing in gold in 2021 did not bring very good results, despite the fact that at that time inflation began to rise rapidly and strongly all over the world. Let’s show that at the beginning and middle of the year, gold was around $1900, but most of the time it was in the $1700-1800 range. At best, we can talk about a stagnation in the market. And this is a bad consolation, because at the same time the inflation rate in Poland or the USA has risen from about 2 to 5-6% per year (year-on-year reading from October 2021).
If you have read the article carefully so far, you already know that the best results for gold can be due to several factors, including the pandemic recovery of economies or investors’ high appetite for risk and the resulting strong increases, for example in the stock markets. It should also be emphasized that the price of gold has already recorded a significant increase in 2020, and therefore the stagnation in the market in 2021 could simply be an accumulation stage, which precedes its rise in the following years. The probability of a bull market will increase if the situation in the global economy begins to deteriorate or, for example, if the epidemic worsens. Then investors can direct their capital to the safe haven again.
It is also important that the US dollar has been in good shape since the beginning of 2021 (the DXY is up about 4%, which is quite a lot). It is important that gold is an “adversary” of the dollar and has a negative relationship with it (in 2010-2020 their correlation coefficient was around -0.5, which is a lot for financial markets). How exactly should this link be understood? As the dollar rises, gold weakens, and vice versa, but remember that this is just a general relationship – there are times when the prices of both assets go up or down.
Investing in practice: when is it worth selling gold?
Even if you are investing in gold for the long term, there will still be times when you will want to make money from at least some of your resources.
As we have already suggested, in the case of good economic conditions and an optimistic outlook, crude does not have much growth potential. So, if you are positive about the future of economies, there is no point in delaying the gold sale. When you anticipate significantly negative real interest rates and/or difficult times for the upcoming economies, it would be wise to hold on to gold or even increase its resources.
The tips above are somewhat general, however you want to choose the best time for a partial or full recovery from your gold investment. It is not easy, because no one knows the future and how the price of the metal will behave. However, keep in mind that there are certain indicators and factors that can be monitored to help guide your investment decisions. It is, among other things, o the Dow to gold ratio, a measure of global debt or investment interest measured, for example, in Google Trends.
From Dao to Gold
Let’s start with an interpretation of the Dow to Gold Ratio, which compares the value of the Dow Jones Industrial Average (DJIA) to the price of gold. More specifically, it shows how many ounces of bullion can be purchased for a unit of the Dow Jones Index. So the interpretation of the ratio is very simple: the higher its value, the more expensive US stocks are in relation to gold, and vice versa. Let’s add that today (as of October 2021) is 20, which should be considered a relatively high level, given its historical record. This shows that gold is relatively cheap – at least relative to US stocks.
global indebtedness
Another factor, i.e. the size of the global indebtedness, is not exact anymore and requires a somewhat intuitive approach. However, on the web you will easily find websites and reports that will let you know how it has grown and how much debt is currently owed to individual entities, countries or the whole world. Why is this important and can it help you in making gold investment decisions?
Let’s remember that gold usually increases in value when real interest rates are negative (when the deposit rate, for example, is lower than the inflation rate). We are dealing with the situation described now and it will not change soon, because the indebtedness of governments, companies and individuals has now reached record high levels. So it is unlikely that central banks will raise interest rates significantly – so much so that there will be positive or at least zero real rates that can cause gold prices to fall. This action could mean an increase in debt servicing costs and problems with the solvency of many entities. However, if there is a strong increase in interest rates one day, for example, due to a favorable economic situation, then it will be worth considering the sale of gold.
Google trends and the interest of inexperienced investors
The last indicator worth looking at is also not a very accurate metric, but it’s definitely worth taking into account nonetheless. The high interest in gold among people who are not interested in investing and financing on a daily basis may indicate that the time is right to make money in your investment. This situation appears from time to time in the gold market, but also in stocks, cryptocurrencies and other assets – often after significant increases in their prices.
You can easily check the popularity of gold investments by visiting Google Trends . By analyzing the interest in terms related to ore (the scale is from 0 to 100, where 100 stands for standard popularity), you will be able to assess whether gold is really interested in the so-called street, that is, small investors who usually enter the market when the uptrend is already very ripe. At the same time, experienced players spend their investments and make their profits.
Is it worth investing in gold?
In this article, we have comprehensively discussed the most important issues related to investing in gold. If you come to this place, surely you already know if it will be a good choice for you. We would like to add from ourselves that we agree with the opinions of many experts who advise buying gold with a long-term perspective in mind. We also share the view that even in the absence of concerns about the future of economies or rising inflation, it is a good idea for gold to have a 10 or 15% share in the investment portfolio. This can be treated as a form of security in the event of an unexpected shock to the financial markets, a serious armed conflict or a problem of global scope, such as a pandemic.
Keep in mind that many people buy gold with an investment horizon in mind for several or several decades. For them, it is simply a certain amount of property that they are willing to sell only under exceptional circumstances. Moreover, many of them are systematically buying additional coins and coins for the average purchase price. If you take this perspective, then crude will be a completely safe asset for you, and short-term fluctuations in its price will be practically irrelevant.
However, if you want to buy gold for a slightly shorter period, say 3 or 4 years, then you should carefully analyze what could happen in the economy and financial markets during that period. The course of inflationary processes, decisions regarding the level of interest rates, the state of the economic situation or global sentiment will affect the profitability of investing in gold. Let’s add that, in the opinion of many experts, these factors will lead to increases in the price of the metal in the coming years (just remember that for a Polish investor, the dollar / zloty exchange rate is also important here). In any case, today it is difficult to imagine a scenario in which gold loses its value in the next few years.
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