The Advantages and Disadvantages of Investing in Gold

The Advantages and Disadvantages of Investing in Gold

Malaysia saw a challenging year for gold in 2022. Thankfully, the demand for gold went up 18% to 4,741 tonners at the end of 2022. The massive purchase by the central bank was the main reason behind this growth. Besides, the gold price is expected to increase in 2023 due to the potential devaluation of the US dollar. 

That being said, there are still opportunities if you want to jump onto the gold bandwagon. Before that, let’s learn about the advantages and disadvantages of investing in gold so you can make better considerations.

Advantages of Investing in Gold

Gold investment is popular in Malaysia. Malaysia’s annual retail gold investment in 2022 was 5.5 tonnes, a jump from 4.4 tonnes in 2021. This popularity is not without reasons, as investing in gold provides these advantages.

  • Low risk of inflation

Gold is often considered a hedge against inflation, which refers to the general price increase over time. But as the value of currencies decreases, the gold price typically increases, helping investors maintain their health. For instance, Malaysia’s average inflation rate is 3% per year, while gold investment has offered a 25% return in the past 2-3 years.

  • Historical angle

Historically, gold has been considered a secure investment that tends to rise in value during political uncertainty and geopolitical turmoil. Unsurprisingly, many Malaysians invest in gold as a type of “protection” that they can utilize in an unforeseen emergency.

  • The reputation of a haven asset

While the Malaysian ringgit has generally demonstrated stability over time, if there were ever a situation where it significantly depreciates to the extent that it loses its value, investing in gold can be advantageous since it is recognized for maintaining its value during crises, making it a haven asset for investors.

  • Portfolio diversification

Considering its status as a hedge against inflation and a haven asset, gold can be a reliable alternative for those wishing to diversify their portfolios. That means you must spread your money across different assets in addition to gold. Diversifying your portfolio will prevent you from losing all your investment if the value of one asset or company declines.

Disadvantages of Investing in Gold

While investing in gold can be a great way to diversify your portfolio, there are still some disadvantages or risks that you need to watch out for.

  • Lack of income dividends

Gold is considered a tangible asset as you can own it in the form of gold bars, coins, or jewellery, although you can also invest in gold stocks or through exchange-traded funds (ETFs). But if you decide to invest in physical gold, you’ll probably miss out on potential dividend payments. Unlike stocks that frequently distribute regular dividends on certain periods, holding onto gold solely offers the potential for value appreciation.

  • It doesn’t generate ongoing income

Since investing in gold doesn’t give out regular dividends, it can’t generate ongoing income for investors. You can’t earn money through dividends or interest as you would with other investments like bonds, stocks, or real estate. You can, however, generate profit when you sell your gold at a higher price than when you bought them.

  • Short-term price swings

While gold has been proven as a haven asset that stands strong against inflation, its price can be volatile in the short term. Gold prices can fluctuate significantly due to short-term factors such as market sentiment and geopolitical events. In recent years, gold prices have demonstrated unpredictable swings, making it challenging to accurately predict and depend on long-term profits.

  • Storage and security issues

If you decide to invest in physical gold, having a dedicated secure space like a vault, locker, or deposit box is necessary. However, it’s still vulnerable to theft and robbery due to gold’s high prices and value. And if you do buy additional storage to store your gold, you will have to spend more money.

No investments are free from risks, and that’s the case with gold investments too. While it offers advantages for diversification and asset protection during downturns, it can also restrict long-term earnings. Please carefully weigh the pros and cons of investing in gold so that you can make informed decisions.