Why Invest in Gold as the Wealthy Do? (Hint: it’s One of the Ways They STAY Wealthy)
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By Alice Walker
Investor Relations Manager at Bullion.Directory
You’ve probably heard the saying, “Do as the Romans do.” Well, in the world of wealth management, it’s more like “Do as the wealthy do.”
And guess what? Many of the world’s wealthiest are quietly stashing away a bit of their fortune in gold. You might be wondering, “Why gold? And should I be doing the same?” Let’s explore.
Have you ever wondered what sets the wealthy apart in terms of investment?
One word: Gold.
Over the years, the world’s affluent have quietly been piling their fortunes into this shiny yellow metal. So why this age-old fascination with gold? And should you, an astute investor, be partaking in this golden trend? Let’s dive in.
The History of Gold as an Investment
Gold’s historical significance as a symbol of wealth is unparalleled. It’s been a critical part of economies, from ancient civilizations that used it as a form of currency, to modern nations that backed their currencies with it.
Even after the Gold Standard was abolished, replaced by our current fiat currency system, gold has retained its relevance.
Warren Buffett, once a (very) vocal critic of gold, made headlines when his company, Berkshire Hathaway, invested heavily into gold in 2020. If someone like Buffett, known for his traditional value investing style, saw fit to invest in gold, it’s a clear sign that there’s more to this precious metal than meets the eye.
Why the Wealthy Invest in Gold
The wealthy are known for their strategic investment choices, and their inclination towards gold is no random whim.
Here’s why:
1. Hedge Against Inflation
Inflation is a constant threat that erodes your money’s purchasing power. This is where gold comes into play. Historically, gold prices have been known to rise with increasing cost of living.
The 1970s were a prime example of this phenomenon when gold prices skyrocketed during a period of high inflation.
As I write this article, the entire globe is being rocked by a 20-30 year-high level of inflation depending on which country you look at. The politicians say it’s because of conflict in Ukraine, oil prices, gas prices, minimum-wage workers wanting a pay rise… You name it, they’re blaming inflation on ANYTHING other than the trillions of dollars they have magicked into existence in the past few years.
Whether inflation is seeing multi-decade highs because nurses want to be able to afford to eat, or because the Fed and governments around the world have been on a money-printing spree doesn’t matter. The end result however, is rapidly devaluing savings plans building a catastrophic future debt – and it needs a cure.
Which reminds me of a client of mine.
A seasoned investor who has seen numerous market cycles, he was telling me recently how his gold investments were the bedrock of his portfolio during the 08 crash and the pandemic and are again not far off their all-time highs. While others witnessed their wealth being eroded in crashes and saw their savings decimated by double-figure inflation, his gold investments remained resilient and kept his overall portfolio in the black.
Now, as it looks like the mother of all bubbles is going to burst he’s unsurprisingly buying as much physical gold as he can.
2. Portfolio Diversification
Wealthy investors understand the paramount importance of diversification better than anyone. Gold, interestingly, often moves inversely to stocks and bonds, providing a counterbalance when traditional investments take a hit.
This characteristic makes it an ideal component of a well-diversified portfolio and is something my client was alluding to when he talked about the upcoming bubble burst. When X Y or Z sets off the next global collapse (my money’s on the banking world’s multi-trillion dollars in unrealized debt – but really the trigger could be anything) and when stocks and real estate tanks, it will be gold saving the wealthy’s ASS-ets.
3. Protection Against Geopolitical Risks and Uncertainty
Our world is often a theatre of unpredictable events and geopolitical tensions.
These uncertainties can wreak havoc on the financial markets. In such times, investors usually retreat to gold, often seen as a ‘safe-haven’ asset.
For instance, in 2016, when the Brexit vote threw the global markets into disarray, gold emerged as a beacon of stability.
Its price not only held steady but appreciated, proving its worth during tumultuous times.
The pandemic (remember that?) saw unseen levels of government intervention and an alarming loss of liberty for most of the world – but gold reached an all-time high.
When Russia invaded Ukraine, China and America began eyeing each other up for a new trade war, and the UK almost destroyed the global banking system in the space of a day, gold again reached a new all-time high.
If you think the world is getting better and it’s all going to be fine – then I’m happy for you.
But I’m buying gold.
4. Gold as a Store of Value
Gold has an impressive track record of preserving wealth. Unlike fiat currencies, which are all eventually subject to devaluation and collapse, gold has been a store of value for several thousands of years.
This characteristic appeals to the rich, who not only aim to preserve their wealth but also wish to pass it down the generations. As the saying goes, “Gold is forever.”
Why the Wealthy Invest as They Do.
The investment mechanisms used by the rich to invest in gold are as varied as they are strategic.
1. Why Invest in Physical Gold?
For the wealthy, nothing beats the allure of physical gold – be it bars or coins.
They see value in having a tangible asset that is universally accepted and cannot be erased or devalued by digital errors or policy changes.
It is a portable concentrated form of wealth, able to be carried, easily secured about a person and just as easily sold at any gold dealer anywhere in the world.
It can be buried or locked away for decades, even centuries with no harm and no degradation – it will emerge as shiny as the day it was minted.
Yes owning physical gold requires secure storage and insurance, but gold’s compact size in relation to it’s worth means that quite considerable value can be packed into a small safe, and in the minds of an internationalized wealthy individual, even better when stashed at a number of safes across the world – for maximum safety and security from any geopolitical issues, tax or legal issues…
2. Why Invest in Gold ETFs and Mutual Funds?
These are favored for their convenience and simplicity, if not their glamor. Gold ETFs and mutual funds allow investors to gain exposure to the performance of gold without the need for storage or insurance.
They can be bought and sold like stocks, making them an easy fit into a diversified investment portfolio, however for the risk-averse wealthy with an eye on possible institutional collapse, gold is better held in a personal vault, than a sheet of paper with a possible claim to someone else’s metal.
3. Why Invest in Gold Futures and Options?
Derivatives like futures and options are another avenue through which the wealthy invest in gold. These instruments allow them to speculate on the future price of gold without having to own the physical commodity.
These can be complex and require a certain level of expertise to navigate. However, they offer the added advantage of being able to hedge against price movements, making them an attractive option for seasoned investors, or investors with in-house wealth management advisors.
4. Why Invest in Gold IRAs (The Tax-Advantaged Approach to Gold Investment)
Saving the best till last, Gold Individual Retirement Accounts (IRAs) are a particularly appealing investment vehicle for the affluent, primarily because of their tax advantages.
A Gold IRA is a type of Self-Directed IRA, which provides investors the freedom to invest in non-traditional assets like precious metals, real estate, and even cryptocurrencies – all while enjoying a massive tax advantage courtesy of the IRS.
4.1 How Gold IRAs Work
With a Gold IRA, instead of only holding paper assets like stocks or bonds, you can hold physical gold coins or bars.
Of course it’s not quite as simple as buying regular bullion: The gold must be stored in an IRS-approved depository; it cannot be kept at home or in a personal safety deposit box; and it must meet certain standards and purities to qualify.
This is because the gold in your IRA is considered a retirement investment and is subject to specific IRS rules and regulations.
4.2 The Tax Benefits of Gold IRAs
One of the primary reasons wealthy investors are drawn to Gold IRAs is their tax benefits.
Traditional IRAs allow you to deduct contributions from your taxable income, which means you could potentially lower your current tax liability. The gold held in your IRA grows tax-deferred until retirement, when distributions are taxed as ordinary income.
On the other hand, contributions to a Roth IRA are made with after-tax dollars, meaning you won’t get a tax deduction when you contribute. However, qualified distributions at retirement are entirely tax-free, which is a significant benefit if you expect to be in a higher tax bracket in retirement, or if you believe tax rates will rise in the future.
As you can imagine, this tax efficiency is particularly attractive to the wealthy, who tend to be in higher tax brackets and very much enjoy doing anything they can to save on taxes.
4.3 The Wealth Protection Aspect of Gold IRAs
Wealthy investors also appreciate Gold IRAs for their wealth protection features. As mentioned earlier, gold acts as a hedge against inflation, a store of value, and a safe haven during geopolitical turmoil.
These characteristics, combined with the tax advantages of an IRA, make Gold IRAs an attractive tool for the wealthy to safeguard their fortune. By using Gold IRAs as a component of their retirement strategy, they can preserve their wealth over the long term in a tax-efficient manner, while also taking advantage of the resilience and stability that gold offers.
In short to the wealthy, a Gold IRA can truly offer the best of every advantage when it comes to investing in precious metals.
Why You Should Consider Investing in Gold
You might be thinking, “I’m not a billionaire. Is gold still relevant for me?”
Absolutely. Gold is not just for the uber-wealthy. The very factors that make it appealing to them – its ability to hedge against inflation, provide portfolio diversification, and act as a store of value – are just as applicable to an average investor – if not more important.
As an example, a super-wealthy individual with globally-spread investments and multiple homes around the world will see some major hurt in a financial crisis for at least a moment, but they will soon take advantage and use spare capital to buy up fire-sale investments after the crash, helping them to accumulate ever more wealth, as they did in the last crash.
A regular American with say $250k in an IRA, fully in stocks could (as in 2008) see up to 60% of their investments wiped out. If they are close to retirement this is irreparable damage and will have a devastating impact on how they spend their retirement.
This is why gold is such an important market hedge and diversification tool.
How to Get Started with Gold Investment
If gold sounds like the kind of asset you want in your portfolio, there are several ways to get started. I for one, favor physical gold and live it every day in my work at the physical gold market’s business directory.
If the idea of owning physical gold appeals to you, consider starting with coins or small bars.
These can be bought from reputable precious metal dealers – we list over 1600 fully rated and reviewed dealers, and have an annual Bullion Dealer of the Year public vote, where you can find the voting public’s top choices.
Digital gold platforms such as BullionVault also provide a novel way of investing in gold. These platforms allow you to buy gold digitally, which they store on your behalf in insured vaults.
Conclusion
As we’ve seen, the wealthy have many reasons for investing in gold, and these reasons stand the test of time. Following in their footsteps can prove beneficial for any investor, regardless of their net worth.
Gold, with its history of preserving wealth and acting as a financial ‘safe haven’, is a worthwhile addition to any investment portfolio.
In my years as a metals advisor, I’ve seen the value that gold can add to a portfolio. It’s not just a shiny metal; it’s a symbol of security, stability, and longevity. With that in mind, isn’t it time you added a touch of gold to your portfolio?
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