Should you speculate or invest in Gold?

Investment

oi-Monika Nihalani

By Monika Nihalani

Published: Thursday, June 30, 2011, 17:51 [IST]

No one can deny the fact that gold is the best performing asset class in recent years and it's one of the lucrative option when it comes to building up wealth. At this point of time, when Euro zone is in high alert, U.S economy is still struggling to come out of the crisis, Asian economies are attempting hard to subdue inflation, you should own some Gold or silver in your portfolio.

But the question is – whether you should speculate or invest in precious metal?

It is very much important for you to understand the difference between the two – Speculating and Investing.

Speculation - When you speculate, you attempt to perform better than other investors through clever timing to enter into the market and forecasting the prices to beat the return. It is widely assumed, that speculators have plenty of knowledge or talents to predict prices that investors lack. They are generally risk takers.

Investment – When you invest, you don't bother about where the markets are heading, you look your investments for long-term perspective with no attempt to time your investments or to determine when the prices will move up or down.

To put it in fairly simple terms. A person who buys or sells gold to ensure that only 10% of his portfolio holding is in gold would be called an investor of gold. Since the person has not based the decision to buy or sell gold on price but rather on the basics of portfolio planning.

Now if the same person buys gold using all savings then it becomes speculation. Timing always yields greater result but it also increases the risk by leap and bound.

It entirely depend on your goals. If you have short-term goals, go for speculation. If you have long-term goals, go for Investment.

And, there's nothing wrong with speculating - provided you do it only with money you can afford to lose. But the wealth that's precious to you - the money you're counting on for retirement - should never be risked on a bet that you can outperform other investors.

To have the best of both the world some individuals either maintain two set of portfolio or they fix a certain portion of their portfolio which is used for speculation.

(Also read: Five different ways to invest in gold)

What about gold as a speculation?
If you speculate Gold, you do it with high financial leverage by putting your money in commodities market by entering into futures contracts. This wouldn't come in investing in gold; but it would be speculation. If prices move in your direction; you can make a lot of money quickly. If prices go against you; loses can be quick and big as well. So, if you speculate, you should allocate smaller portion of your portfolio.

What about gold as an Investment?
If you allocate your funds in the form of investment in Gold, that will promise you safety of principal and will provide you an adequate return and stable returns over the period of time. You can invest in Gold by buying jewelery, coins, investing in gold mining stocks or gold ETFs, gold mutual funds, etc.

(Read about how to invest in Gold ETFs)

Final Note: Never have your all funds invested in single asset, always go for diversification strategy, have exposure of all major assets for balanced portfolio so as to maximize returns and minimize the risk.

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