The Traps Of Gold

Gold has certainly resurfaced on the investment radar. After being down in the doldrums for twenty years since the 1980s, prices started climbing in 2001. From a low of $255, it rose by double-digits percentages (actually an astounding 18.8 percent per annum) every year since. It broke the $1,000 mark for the first time in March 2008, slipped below that for a few months, and then resumed its climb. At the point in writing, the price is hovering at the $1,350 mark, just below the all time high of $1,4XX reached in December 2010. (This figure is at the point of writing. It is likely that it will be surpassed by the time you read this article.) This made gold one of the best (if not the best) performing investment in the past ten years, beating stocks, real estate, bonds and other commodities.

This being the case, I suppose the question is then: “Should you own gold?” The overwhelming answer is yes. If you already own gold, good; go out there and buy some more! If you have not done so yet, then it is time to start buying some! There – the answer cannot be more straight-forward than that!

Now, there are many reasons why the price of gold is shooting to the heavens; two of them are the very real threat of the collapse of paper money and explosion of the derivatives market. Incidentally, paper money is only two hundred years old compared to gold that has been used as money for some six thousand years! It is a good bet that the latter will outlive the former.

At the same time, this is where things get a little bit interesting. Yes, you should own gold and you can make serious money from it. However, the traps in gold are as wide and deep as the mines themselves! If you chose incorrectly, you could actually lose money even when the price of gold is rising. (Anything that provides an opportunity to make lots of money also comes with the opportunity to lose lots of money!)

Next, I can also vouch that you will be getting conflicting advice when it comes to gold. First, there are few gold experts in Malaysia which means that most people know very little about it. Next, some people will tell you to buy gold in x form and avoid the others. It is very likely that these people are selling x. Some others, including financial planners and wealth advisors, will give you a hundred reasons and may even provide facts and figures to prove why you should not buy gold. The reason is simple: if you buy gold, they get nothing! Further, it will mean less money for you to buy whatever they are selling.

Furthermore, unlike days of yesteryear when the choices were limited when it comes to gold, today, there are a multitude of choices. These include collector coins, commemorative coins, ETFs, shares of mining or trading companies, certificates, pools, Gold Savings accounts, futures, options, Structured Notes and even digital gold! It’s enough to make your head spin just trying to make sense of the choices.

Add the fact that most people are clueless when it comes to gold, and you can see why investing in gold can be a hazardous thing. While all the products mentioned earlier are gold in some form, they may not behave like the real thing, and therefore may not give the desired return to the investor. In fact, some of them should not even be considered as an investment. Take for example, jewelry. While bangles, rings and pendants are certainly gold, they cannot be considered as an investment in the real sense of the word. And why not? There are a few problems with jewelry when we’re evaluating them from an investment perspective. First is the high mark-ups charged by the dealers, which can be 100 percent the price of the gold. Second is the extremely high discount charged by the dealers when you are selling the piece back to them. For example, one local gold dealer will knock off 25 percent (!) from the price when they are buying it back from you and that my friend, is an exceptionally high charge. Third and perhaps the most serious problem: you can only exchange it for another piece of jewelry; you cannot get the money in cash.

And this is just one of the traps! There are plenty more that awaits the unsuspecting and uneducated investor.

So, just about the only way you are going to get an unbiased – and therefore correct – decision on gold is to get yourself educated on it by reading as much as you can – ideally before investing a single cent in it! Otherwise, you could be losing money instead of making it!

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