3 Things to Consider Before Investing in Gold

by Tim on September 12, 2011

It’s hard to believe how much growth we’ve seen with gold in this past decade. In the last five years alone, the price of gold has shot up nearly 200%! As the US continues to work through its overwhelming amount of debt and as the stock market continues to move like a roller coaster, I’m sure we’ll see even more investors flock to precious metals like gold. The more you hear about the uncertainty of financial systems across the globe, the easier it is to let the fear drive you to make decisions that may not be in your best interest as an investor.

Before you invest in gold, I hope you’ll consider these thoughts to help ground your decision to change your investment strategy. As for answering the question, is gold a good investment, we won’t be covering it here, but you can hear my thoughts by following that link.

I’ll also make it a point to say that I am not guiding you into a direction to invest or not invest in gold. No one knows with absolute certainty how gold will perform in the future, but that doesn’t change the fact that you should carefully research and approach that decision with caution.

1. Is Fear Driving My Decision?

Yes, I know your 401(k) finally reached its pre 2008 level this year. The national debt level boggles my mind too. Social Security… I don’t have any idea what it will look like in 20 years. Should I go on?

There are plenty of things to worry us if we look for it. Does that mean we should be oblivious about what’s happening with our economy both here and around the world? Absolutely not. I think it’s our responsibility to personally research and learn about how our economy works. The same is true about our investments. You wouldn’t jump into a stock that you haven’t researched, would you?

One of the biggest drivers of the rush to invest in gold has been fear. I agree, there’s a lot of uncertainty out there that can cause you to be scared, but making an investment decision because you fear the unknown is scary in itself!

We don’t need to make decisions based on fear – 2 Timothy 1:7 says “For God hath not given us the spirit of fear; but of power, and of love, and of a sound mind." Having a sound mind is critical when it comes to choosing your investments, so ditch the fear and make an educated decision based on research and advice from a trusted financial advisor.

2. Is the Pursuit of Riches My Goal?

The rise in the price of gold looks awfully tempting, doesn’t it? Sure, I wish I bought gold in 2005. Even better, I wish I had bought Apple stock in 1997. Or even better, I wish my parents had purchased stock in Berkshire Hathaway in the 70’s. The returns of an investment look extremely obvious and enticing when you look at it with hindsight.

The investment phrase “past performance is not an indicator of future returns" should ring through every investor’s mind before they decide to invest. Unfortunately, we can’t know how an investment will perform in the future, which is why chasing returns based on past performance is so dangerous.

I’m reminded of the verse found in Proverbs 13:11 that says “Wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows." It doesn’t matter if it’s gold, silver, foreign stocks, or oil – if you’re looking to jump onboard blindly to ride the ‘high waves,’ you’re likely to get burned.

3. How Long Will I Hold Gold?

Here’s a great question to ask yourself before you invest in anything. What’s your exit strategy? Do you have a plan to sell when it reaches a certain amount? What about a plan to sell as it comes down in price? (Yes, even gold comes down in price depending on what people are willing to pay for it that day.)

If you don’t have a good idea as to how you can get out of the investment appropriately, you probably shouldn’t be in it. Conservative holdings (5-15%) can make it easy to manage the sale of precious metals from your portfolio. But if you’ve invested a significant part of your nest egg into gold, you may have a difficult time knowing when to sell.

Like it or not, emotions play a huge role when it comes to investments. That’s why it’s important to approach any investment decision with rational thinking – not fear or greed.

What are your thoughts on investing in gold? Is this a smart approach to take before buying gold?

Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.

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