5 common mistakes new gold investors make
Gold shined in 2024, outperforming many other investment assets this year. Gold's trajectory can be traced back to late 2023, when its price surged to a record high of $2,135.39 per ounce due to geopolitical tensions, rising inflation and other factors. Amid these pressures, investors fled to safe-haven assets like precious metals to protect their portfolios.
These conditions have continued in 2024, driving the ongoing rise of gold prices. According to American Hartford Gold, the price of gold has soared from $2,063.73 on January 1 to $2,752.19 on October 25. While the price has dropped since that point, the surge illustrates gold's appeal as a store of value and hedge against inflation.
Perhaps not surprisingly, gold's impressive return on investment has generated a lot of media coverage and interest in gold investing. New investors should take caution, however, as they may not be familiar with the common pitfalls of gold investing. Below, we've compiled five common mistakes new gold investors make so you can take steps to avoid them.
5 common mistakes new gold investors make
Before putting any money into gold, be sure to understand these five simple, but easy-to-make mistakes.
It's important to be clear on your goals and what you're seeking before investing in gold to avoid choosing the wrong type. Gold comes in several forms, from jewelry and coins to gold IRAs and ETFs. Each type serves different purposes and carries its own unique set of benefits and downsides.
Physical gold, such as bars or coins, provides tangible ownership, but you must store it securely, which can be inconvenient or costly. On the other hand, options like gold ETFs offer exposure to gold's value without the hassle of physical storage, making it easier when you want to sell. It may not make sense to invest in physical gold, for example, if you don't want to store it and would prefer the management convenience of an ETF.
Brandon Thor, CEO of The Thor Metals Group, says choosing the wrong type of coin is a common problem. Thor advises new investors to choose well-known coins over the proprietary coins some dealers offer.
"This is a huge problem in our industry. Think about it. If you are a predatory company trying to make a huge margin on the sale of a metal, is it going to be easier to accomplish this when you are overcharging for an American Eagle that the prospective buyer can price-check across about 1,000 different dealers, or with some proprietary coin that is minted exclusively for a specific dealer and thus there is no way for the buyer to price-check the metal? You mix that fact in with a silver-tongued salesman and you have a 'bad deal' stew."
Thor suggests that researching online is one of the best ways to improve your odds of investing in the right bullion. "Google the metal being recommended. If the coin is only being shown at a few places, it is a proprietary coin with an illiquid market. Stay away. You want coins (or bars) that you see everywhere because that indicates they are universally liquid and also gives you a robust sample to make price comparisons, which will ensure you do not get a raw deal."
"The biggest mistake I see new investors make is conflating gold and gold stocks," says Jeff Clark, founder of TheGoldAdvisor.com. "They're completely different assets; gold is a form of money, while gold stocks are a speculation on a particular miner. Gold can hedge against recessions, stock market weakness, geopolitical conflicts and all kinds of crises. It's performed better than bonds, including U.S. Treasuries. An investment in gold should be made with this in mind. A mining stock, on the other hand, is a speculation on how well a miner will perform. They come with more risk but also more upside if they're successful, especially the junior mining stocks."
If you're considering investing in gold for the first time, consider your goals and preferences and whether you want to invest in physical gold or gold stocks. Physical gold may act as a safe haven during economic downturns, which you might prefer if you're seeking stability. On the other hand, you might want to explore mining stocks if you're willing to take on higher risk for potentially greater returns.
It's essential to read reviews and do your research to help ensure any gold dealer you're working with is reputable. And if a representative says something that sounds off, listen to your gut, says Thor.
Thor reminds new investors that bullion's value comes from its weight, purity, quality and the supply-and-demand market that exists for that specific metal. Accordingly, conversations with gold dealers should focus on those fundamentals of gold, not superficial features.
"Most people have seen enough TV shows and movies, and have enough common sense to understand that when they are investing in gold, the conversations with metals dealers that should be taking place should never be about the animal on the coin or a special edition or only so many of the coin printed. People instinctively know this and know when the advice being given by the metals broker does not make much sense, especially when it is being given to justify a metal that has a high market value compared to spot (current market price), but they underestimate their gut and put too much emphasis on the 'so-called expert opinion.' It is not rocket science. Trust your instincts, and you will come out OK."
Financial advisors and gold experts alike often caution against buying too much gold for a couple of reasons. First, gold's strength and attraction to investors lies in its role as a portfolio diversifier and hedge against inflation. It can help balance against volatility in stocks and bonds, but investing too much could limit potential returns.
Second, other assets, such as stocks or real estate, may offer higher long-term ROI. Adding gold can bring long-term stability to your portfolio, but it may come with greater fluctuations in the short term, and it generally lacks the growth potential of other asset classes.
"Just like any other alternative asset's place in a diversified portfolio, the key is keeping the position in check—under 5% of investable assets," says Dinon Hughes, a financial consultant at Nvest Financial. "This isn't necessarily a 'set it and forget it' either, with gold up more than 30% year to date. What may have started as a small position could now make up a more substantial piece of your net worth than you had planned for. Gold speculators give it the wrong reputation—it is not in a diversified portfolio as a wealth-builder, but rather as a hedge."
Gold's impressive performance in 2024 has brought many new investors to try their hand at precious metals investing. But, prospective investors should be mindful of common pitfalls. To make the most of gold in your portfolio, clearly define your investment goals and the level of risk you're willing to take beforehand. Limit your portfolio's gold allocation, and research and compare reputable gold dealers to boost your odds of a successful entry into gold investing.
Source: https://www.cbsnews.com/