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  • Rohit Musale, CFA

Why & How to Invest in Gold

How to invest in gold ?

Why to invest in gold?

How much to invest in gold ?

When to buy and when to sell gold?

Where to store gold?

Should I buy physical gold or digital gold?

If these are some of the questions that you have been thinking about, then hang on till the end of this post, because I have some ideas, which I want to share with you today.

So let's get into it.

Now, if you are thinking about investing in gold, then in this post, I want to give you some context, which can help you make the right decision.

A lot of people have been asking me some of these questions.

How to invest in gold?

Why to invest in gold?

How much to invest in gold ?

When to buy and when to sell gold?

Where to store gold?

Should I buy physical gold?

Or should I buy digital gold?

The reason why I invest in gold is because it's real money.

In my view, when paper currencies crash, the value of gold goes up, allowing me to buy assets at bargain prices.

Assets provide me passive income and passive income makes me financially free.

So a gold investment is directly related to you achieving your goal of financial freedom in your life.

This is why I have decided to take this topic for today's post.

So let me first explain the reason why you should be investing in gold.

If your why is clear, then the how is very easy.

Here are 15 different reasons why you should consider owning gold.

And when I say gold, I am talking about physical gold, I'm not talking digital gold.

1) Gold is insurance.

I look at gold as an insurance against mismanagement of the economies by the governments of the world.

If the governance of an economy is not done well, it creates uncertainty and reduces the value of the currency of that nation.

That is when gold shines.

That is when the value of gold goes up.

So I don't look at gold as an asset or an investment.

I look at gold as an insurance against misguided fiscal and monetary policies.

In other words, if something goes wrong in the economy, I have my gold, which protects the value of my wealth.

This is also the reason why I am not bothered about the price of gold.

I am only concerned about the value of gold.

When I am buying gold, I don't even look at the price, because my intention of buying gold is not to buy & sell.

My intention of buying gold is to protect my wealth, and my true wealth is the time that I use to produce income.

So, I can say that, I am actually storing my time in gold coins.

That is how I look at gold.

2) Gold is real money.

Almost all central banks in the world are busy printing money right now.

When I say money, I am talking about currency.

I am talking about fiat currency.

I am talking about government money.

I am talking about paper currency.

Paper currencies are designed to lose value over time, because it is not backed by any precious metal.

They used to be, before 1971.

However, after the US took the dollar off the gold standard, the link between paper currencies and gold was permanently cut off.

That is why I consider gold as real money, because the supply of paper currency can be managed or manipulated.

However, gold is not something that you can create out of thin air.

It occurs naturally and it is available in limited quantities on this planet.

3) Gold has a long history.

My mentor, Robert Kiyosaki says that there are three kinds of money in the world today.

Government Money.

God's Money.

People's Money.

The government's money, as we have discussed, is paper currency.

People's money are things like bitcoin and cryptocurrencies, which are not created by central banks.

And god's money is real money, like gold and silver.

Paper currencies, as we have discussed, are designed to lose value over time.

And historically speaking, almost every paper currency in the world has gone down to its true value, which is zero.

In some cases, it might take 100 years for the value of that currency to go to zero.

But eventually it does.

And as far as people's money is concerned, bitcoin is the first digital currency which was launched in 2009.

So it's like 12 or 13 years old right now.

It doesn't have a history.

It has not been tested in a market crash.

There is a lot of uncertainty around it.

It is volatile.

It is unstable.

However, if you look at gold, gold has a rich history.

Human beings have been using gold since past 5,000 years.

So when I own gold, I have history behind it, which gives me confidence as a gold owner.

4) Gold cannot be manipulated.

Well, the price of gold can be manipulated.

However, the value of gold depends on market forces.

Historically, the more the money that was printed, the more valuable gold became, every single time.

So some governments and central banks in the world have an incentive to keep the price of gold down, because they want to make large purchases of physical gold bullion.

So yes, I agree that the price of gold potentially can be manipulated, because the price of gold is set on the paper market, or the digital market, not the physical market.

However, gold itself is something that is available in elemental nature in the world and whose value cannot be manipulated.

5) Central banks own gold.

Central banks are busy printing money.

However, if you closely observe, central banks own thousands of tons of gold.

Why is that?

Obviously they see value in gold.

Otherwise, why would they keep gold in their vaults?

After all, they have the power to control the money supply, right?

They have the power to create money out of nothing.

So, if you could create money, why would you ever own gold?

Well, there is a reason.

Central banks do see value, which is why they own thousands of tons of gold, especially countries like Russia and China, who have been stockpiling gold in recent years.

Why would they do that?

They do it because they understand that, the paper currency system in the long run will eventually fail.

So they are trying to make their position safe, financially.

6) No counterparty risk.

Gold is one of the few assets in the world which does not have a counterparty risk.

What is counterparty risk?

Let me give you an example.

If I make a fixed deposit in a bank, to earn some interest income, that fixed deposit becomes an asset for me and a liability for the bank, right?

That fixed deposit has got a counterparty risk.

I am taking that counterparty risk, because, if something happens to the bank, and the bank goes bankrupt, they will not be in a position to pay me back my money.

So what I think as an asset is not really an asset.

It is actually a liability of a financial institution.

That's what I mean by counterparty risk.

That risk does not arise, when I own a gold coin.

I can keep a gold coin with myself without anyone owing me any money.

So when I own a gold coin, nobody owes any money to me.

Compare this to a fixed deposit.

When I make a fixed deposit, the bank owes me money, right?

That's a risk because banks can collapse.

That's what I mean by counterparty risk.

7) Gold cannot be printed.

As I discussed earlier, paper currency is something that can be printed or created electronically.

Gold is something which is naturally available on this planet.

So it is available in the elemental form.

You cannot create new gold.

You only have to extract what is already available on this planet.

Moreover, if you look at paper currency, it is something which can be burned or torn.

Or you can even soak it in water.

If you do that with paper currency, its value will go to zero.

If I burn a $100 bill, its value becomes zero.

On the other hand, if I take a gold coin and if I cut it, its value does not go to zero.

If I burn the gold coin, it will melt, but its value will not get diluted.

If I put the gold coin in water, nothing will happen to it.

It will retain its value.

So, you can clearly see how gold compares with paper currency.

It is resilient.

That is how money should be.

Basically, anything that is created by humans against nature is not of much value.

When we are printing money, we are going against the forces of nature.

When we are printing money and not backing it up with gold, we are creating our own artificial economy, which is not likely to sustain.

8) It is like my money with me.

When I buy a gold coin or a gold bar, I can say that it is my money or my wealth with me, not with someone else.

I see people owning stocks, bonds, mutual funds and cryptocurrencies.

All of these are available on digital platforms.

Anything that is available on a digital platform is subject to hacking risk.

That does not happen with gold.

If I own physical gold in the form of coins, bars or jewellery, then I don't have that hacking risk.

It is my money with me and I am responsible for storing it safely.

Yes, there is a cost of storing and safekeeping.

However, the benefits of owning gold far outweigh the benefits of owning other two types of money available, right now in the world.

9) Gold is liquid.

Liquidity is the ability to buy or sell a particular asset.

You will notice that gold is always liquid.

In other words, you will always find a buyer for gold, if you wish to sell your gold.

You will also always find a seller for gold, if you wish to buy gold.

One thing to note here is that, these days, it is easier to find a buyer for gold, than it is to find a seller for gold, because people are slowly beginning to realize the value of real money, which is gold and silver.

There is too much money printing happening right now, in the world.

And people are noticing it.

And there is enough history available on paper currency for people to look into, which makes them aware of what is going on, in the world of money and business.

So, people are holding on to their gold, which is why it is difficult to find a gold seller these days.

Having said that, there is a big market for gold.

Digital gold is a liquid financial instrument.

If you want to take exposure to the price of gold, you can do that very easily by going to the financial markets, rather than going to the physical markets.

Just keep in mind that in financial markets, there is always that counterparty risk.

To avoid counterparty risk, you will have to own some physical gold.

Irrespective of everything, gold is always going to be liquid.

There is always going to be a buyer and a seller for gold, because there is a 5,000 year history behind this.

People have gone to wars because of gold.

People have won wars, because they had gold.

People look at gold as a sign of wealth.

Humans intuitively understand the value of gold.

People even choose to wear gold on their bodies as jewellery.

That is how gold is prevalent in our culture right now.

And it has been like that, for long periods of time.

The kings and the queens used to wear gold, lots of it.

You cannot hang a bitcoin around your neck to look beautiful.

You cannot wear a bitcoin ring in your fingers, right?

That can only be done with gold or other shiny looking precious metals.

10) Gold has a global market.

Gold is liquid and it has a global market.

If I buy a small gold coin in India, then take that gold coin and travel to Russia and try to sell the gold coin there, I am sure, I will find a buyer there.

So gold has a global market.

On the other hand, if I carry some Indian rupees with me and I go to Russia and I try to sell those rupees, chances are, I will not find any takers there, because, except for some exchange houses, the Indian currency is not valuable to Russians in Russia.

They use their own currency to buy their groceries and goods and services.

However, when I take gold from my country to another country, people can buy that gold from me with local currency.

I can convert that local currency into any currency I want and be okay with that.

So gold has a global market.

11) Even criminals understand the value of gold.

Back in the 70s, the 80s and the 90s, if you see, people used to smuggle gold?

Why would they do that?

Because they understand the value of gold.

They could have chosen to smuggle paper currency.

Even criminals value gold.

Even the ancient empires, when they captured other nations or cities, they seized the gold there.

Now, you only steal things that have value.

You don't usually take control over things that don't have any value, right?

So, if criminals can understand the value of gold, you and me, we are decent citizens who have honor and we obey the law.

I think we should definitely consider buying gold, legally.

12) Gold is not affected by demonetization.

Back in 2006, in my country, India, we went through a phase of demonetization.

In this process, the 500 rupee bill and the 1000 rupee bill were effectively demonetized overnight, which means, if I had 500 rupee bills and 1000 rupee bills at that time, I had to go and deposit that into a bank and convert it into a bank account balance, rather than hold that cash with me, because that cash was effectively banned.

So, basically what this means is that, the government has control over the currency that it creates.

If you are holding $10,000 cash in your pocket right now, your government has the authority to declare that, those $10,000 are no more valid, unless and until you come to the bank and deposit it.

These problems do not occur, when you own physical gold.

Demonetization affected a lot of cash based businesses in India.

But those people who owned gold were not affected.

Because, you cannot demonetize gold.

Gold is gold. You can't do anything about it.

13) It can survive for thousands of years.

As we have discussed earlier, gold has thousands of years of history behind it.

Gold is available in elemental form in nature.

It has an atomic number, so you cannot destroy it.

You can displace it, but you cannot destroy it.

It has been here for many years, before even humans showed up on this planet.

And it will always be here, even if the human race gets wiped out from this planet.

14) Gold is scarce.

It is the scarcity of gold, that gives it the value.

It is becoming increasingly difficult to extract gold from this planet.

Now, anything that is scarce, and has certain chemical properties, which make it suitable as a form of money, will always have value.

Gold and silver fit the bill.

Silver is still subject to corrosion.

It reacts to sulphur.

I think, however, gold is more inert.

Nothing happens to gold.

That's why, when I own gold, I feel like I own history.

15) Gold is considered as a safe haven in times of uncertainty.

The markets are intelligent enough to know that when uncertain times come, they need to look at a safe haven asset.

And gold is considered to be one of the safe havens, where people will always go to, when they see the value of paper currency collapsing.

So the price of gold may remain subdued for a while.

However, in the long run, the price of gold will always catch up to its real value.

So, these 15 reasons are the real reasons why you should be owning gold.

Let me now tell you the three wrong reasons to own gold.

1) You want to make money.

People who are investing in gold to make money, do not understand that, gold itself is money.

What is the point in trying to trade gold just to earn some extra paper currency, when you know that, paper currencies are destined to lose value.

So, making money is the wrong reason to own gold.

2) You want to trade gold.

Trading of gold is okay on the financial markets, if you are planning to use the profits of trading to buy some assets which can give you cashflow.

However, if you are just trading gold to make some money, again, you are trying to earn paper currency by exchanging your time.

Why would you exchange your time for paper currency?

So, that's why buying and selling of gold or trading of gold is not the correct reason to own gold.

3) Hold gold forever.

There are gold bugs available out there who are so fascinated by gold that they want to own gold and keep it forever.

That's not the correct approach either, if you want to be financially free.

It's a different story, if you are a coin collector.

You want to own gold, because eventually when its value appreciates, it will help you buy assets on the cheap, which can give you cashflow, not only now, but in perpetuity for your next generation and the generation after that.

So, holding gold forever, is not the right reason to buy gold.

I just gave you the real secret to owning gold.

When you buy gold, buy it with the intention of selling it someday and exchanging it for an asset to produce passive income, which can help you meet your goal of financial freedom.

Because, as I said earlier, gold is neither an asset nor an investment.

Gold is real money, and it should be used as money to buy a cash-flowing asset.

Because our ultimate goal here is to achieve financial freedom not only for us, but for our next generation and the generation after that.

Our goal is not to hold on to gold forever.

It can be held, if you have excess cash.

You can store the value of your time in gold.

But to create family wealth or intergenerational wealth, what you need is a regular cashflow coming into your bank account.

The next question is: when to buy and when to sell gold.

The answer is very simple.

Whenever there is too much money printing happening in the world, all of that money is going into the real estate market, or the stock market or the cryptocurrency market.

That is the exact time when people are neglecting precious metals like gold and silver.

That is the exact time when you should be buying gold, because that is the exact time, when gold remains undervalued and neglected.

And currently, as I write in December 2022, we are in that time.

Just look at the recent price movement of gold, and you will understand what I am talking about.

This is a great opportunity to buy gold and silver as well.

Another way to look at the timing of gold purchase is, when you start comparing gold with property values.

Usually, people measure property values in terms of paper currency.

So for example, I may say that in my country, a normal two bedroom hall kitchen house costs me around 9 million units of local currency.

However, if I convert that paper currency into gold, I can actually measure the price of this two bedroom hall kitchen property, in terms of ounces of gold that I need right now, to buy this property.

And I can track that particular amount of ounces over a period of time.

You will notice that, when the market collapses, when the paper currency system or the monetary system collapses, that is when the value of gold goes up, and it takes less and less number of ounces of gold to buy the same property.

That is the exact time to sell gold.

That is how I look at gold.

I measure the value of every asset in the world in terms of gold.

And I track these values in terms of gold, not in terms of dollars or rupees.

That gives me the correct price movements of assets.

And when I see the value of assets going down in terms of gold, it's a clear indication that, I need lesser ounces of gold to buy these assets on the cheap.

That is the time when I can choose to exchange my gold for a cash-flowing asset.

Because ultimately, our goal is to become financially free.

Our goal is not to sit on a pile of gold.

Another way to look at the timing of buying and selling of gold is, check the money printing activity.

The more money they are printing, the more gold you should be buying.

It is as simple as that, because the more money they print, the more they are diluting the value of paper currency.

And the more they dilute the value of paper currency, the more is the value of gold.

I am not talking about the price of gold here.

I am talking about the value of gold.

There is a difference between price and value.