Investing in gold can be a great way to diversify your portfolio and protect your wealth, as it has historically been considered a safe-haven asset. But if you are a beginner investor, it’s easy to feel confused and overwhelmed by an abundance of options or unfamiliar terminology.
Even if you're not new to investing in gold, it never hurts to brush up on your knowledge and make sure you're making the best decisions.
In this article, we'll cover 6 common mistakes that people make when buying gold, and provide tips to help you avoid them.
Let’s dive in!
1. Buying gold only during economic or geopolitical turmoil
One of the most crucial things to avoid when investing in gold is making decisions based on emotions, rather than a well-thought-out investment strategy.
A common mistake beginner investors make is buying physical gold only when a significant economic or geopolitical crisis erupts, which often makes the price of gold skyrocket.
However, this approach can be misguided, as it assumes that gold is solely a crisis commodity. In reality, as part of a diversified portfolio, gold can be an essential part of your long-term investment strategy, providing protection against inflation, currency fluctuations, and other uncertainties.
By only buying gold in times of crisis, you may miss out on potential gains that could have been made by investing in gold beforehand.
How to avoid it: One way to maximize the advantages of your gold investment is to buy gold and precious metals without waiting for a crisis to arise and to keep adding to your gold savings on a regular basis.
This way, you will be able to take advantage of its potential for long-term growth and benefit from cost averaging, where you invest the same amount regularly, regardless of the current price of gold.
💡Read our SPOTLIGHT to learn more about the advantages of using the dollar-cost averaging strategy in gold investment.
2. Not doing enough research before investing in gold
As with any other investment, when it comes to buying gold bullion, don't just jump in blindly as it is important to do your research and find a trustworthy reseller.
Not doing your homework can lead to some potentially serious mistakes. For example, if a gold reseller asks for money upfront when buying gold online, it's a major red flag, as is lack of transparency, when they are hesitant to give you all the details about the gold they're selling.
A reputable reseller should be transparent about the purity and quality of their gold, the fees associated with the transaction, and any other important details.
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How to avoid it: Doing your research is key to avoiding the risks that come with choosing the wrong gold dealer. You can start by talking to several resellers to find the one you can trust and ensure that you're investing in high-quality gold products that will help you reach your investment goals.
3. Considering gold a short-term investment
When it comes to investing in physical gold, it’s usually a good idea to take the long-term approach.
Of course, everything depends on your investment strategy and goals. While it's possible to speculate on gold's price, it's generally not a short-term investment due to its historical price fluctuations and long-term appreciation trend.
As with any other physical product you can buy (cars, clothing, etc.), resellers will apply a fee at purchase (for precious metals, this fee is often called the “premium”) which includes production and logistical costs as well as the reseller’s margin.
Therefore, after their purchase, gold investors and savers will have to wait for the gold price to rise enough to cover this initial cost before they can start seeing a profit. And as we know, gold tends to move slowly, and historically increases in price over the long term.
Which ties in to our first point: if you avoid buying only during troubled economic times, when the price is usually higher, you are more likely to cut down on that waiting time to recoup your initial cost.
How to avoid it: When investing in gold, it's important to keep in mind that it's not so much a source of income as a means to build wealth and savings through price appreciation over time. Also, as with any other investment, be sure to use funds that you're comfortable with.
💡Check our forecast to see where the gold price is expected to go in 2023.
4. Not buying the best gold product for them
Beginner investors may put all their money into buying just one type of gold product, such as gold coins.
For example, if your aim is to be more cost-effective, gold bars may be a better choice, simply because the production of gold coins involves more time, money, and craftsmanship costs, which are reflected in their prices. So, if you're looking to get more gold for your money, bars may be the way to go.
On the other hand, if you are interested in collecting rare coins or if you want to gift gold to someone special, coins or collectibles might be a better option. Additionally, gold coins can be easier to sell in small amounts than bars because of their lower weight and smaller size, often making them a more flexible choice for investors.
💡Discover the essential differences between buying gold bars and coins and choose the best option for your investment strategy.
How to avoid it: consider diversifying your portfolio and savings with various types of physical gold products, such as bars, coins, and collectibles, while also remembering that there is no one-size-fits-all approach when it comes to diversification, and you should determine the best strategy based on your specific investment goals.
5. Overlooking the importance of diversification
Many gold investors might already know about diversification, it might even be the reason they started buying gold.
Diversification is the action of buying different assets within different asset classes to spread the risk of their investment and to balance their portfolio between risk and safety.
But after that initial gold purchase, as you keep investing in different assets, it’s easy to forget to check if your portfolio is still balanced and well diversified. It’s not rare that investors who think themselves as risk-averse end up with way too many stocks or crypto investments and not enough gold for their strategy, making their portfolio unbalanced towards risk.
Gold is a great diversifier, as its price is often uncorrelated, or negatively correlated (meaning it tends to go up when other assets go down) to most other assets, and particularly stocks.
💡Click here if you’re asking yourself: “How can I diversify my investment portfolio?”
How to avoid it: regularly check how your general investment portfolio is balanced to make sure it fits your strategy. If you feel like you have too many risky assets and not enough safe-haven assets like gold, it might be time to sell some of your risky assets, or to buy a bit more gold. Depending on the level of risk you’re comfortable to take, experts often talk about keeping between 5% and 20% of your portfolio in gold and precious metals.
6. Not paying enough attention to gold purity
Another thing that many investors overlook is the purity of the gold they are buying.
The purity of gold is determined by the amount of pure gold that is present in the product. For example, if a gold coin is made of 24-karat gold, it means that it is made of 99.99% pure gold (the highest possible gold purity). But, if it is made of 18-karat gold, it means that only 75% of the coin is pure gold, while the rest is made up of other metals.
Why is this important? Because to be considered investment gold, a product must have a purity level of 99.5% and above. Any purity level below that will be great for jewelry or industrial use, but not for investment.
How to avoid it: the purity of your gold products affects their value, durability, and liquidity. So, when you invest in gold, make sure you are buying high-quality, pure gold to ensure that your investment retains its value and is easy to resell when you need it.
What are the key takeaways?
- Avoid buying gold only during economic or geopolitical turmoil as it assumes that gold is solely a crisis commodity, and you may miss out on potential gains that could have been made by investing in gold beforehand.
- Do your research and find a trustworthy reseller to avoid potential mistakes. A reputable reseller should be transparent about the source of their gold, any fees associated with the transaction, and any other important details.
- Consider taking the long-term approach when investing in physical gold, and keep in mind that it's not so much a source of income as a means to build wealth and savings through price appreciation over time.
- Choose the correct type of physical gold products for you, such as bars, coins, and collectibles, based on your specific investment goals.
- Make sure your portfolio remains diversified, check it regularly, and don’t hesitate to buy or sell some of your gold to rebalance your portfolio if needed.
- Pay attention to the purity of your gold to make sure your investment retains its value and is easy to resell when you need it.
