Quiz: Fact or Fiction: Investing in Gold: HowStuffWorks
Fact or Fiction: Investing in Gold
4 Min Quiz
Image: refer to hsw
About This Quiz
Gold is one of the oldest forms of wealth on the planet, and is still commonly traded to this day. Whether you're talking buying bullion or speculating in gold options and futures, test your knowledge of modern gold investing in this quiz.
Fact or Fiction: Gold tends to increase in price when inflation is high.
Historically, gold does tend to increase in price during periods of heavy inflation. Investors have often used gold as a hedge against fluctuating currency values, based on the assumption that it will always retain some value as a precious metal.
Fact or Fiction: Gold outperformed most other investment vehicles during the economic of 2008.
While the stock market, the real estate market and many other markets declined drastically during the 2008 global economic crisis, gold consistently outperformed other markets by rising consistently over the same period.
Fact or Fiction: Gold increased in price by more than 100 percent in 2010.
Gold actually increased by 27 percent in 2010, which is still impressive, considering the stock market increased by 11 percent during the same period.
Fact or Fiction: The upswing in the value of gold is nothing compared to historical gold prices.
Gold has actually posted historical record high prices consistently since it began to climb during the 2008 crash. As recently as December 2010, gold posted a new record high price.
Fact or Fiction: Experts recommend that investors keep a small percentage of their investments in gold (around 5 percent) to protect their portfolios against economic downturns.
Most investment advisors agree that a truly diversified portfolio should include a small percentage of gold investments. The conventional wisdom is that, while gold prices have been historically volatile, they will never bottom out.
Fact or Fiction: Many world governments still mint their own gold bullion coins.
While most countries have abandoned the gold standard, many governments still mint gold coins in addition to their standard currency, including South Africa, Canada and Australia. The coins are usable as legal tender, but are more often traded for their (much higher) value in gold.
Fact or Fiction: The United States currently does not mint a 1-ounce gold coin.
The United States mints American Eagle coins in several denominations, including a 1-ounce coin. While the coins can be used as legal tender, the pure gold price is much higher. American Eagles are traded for the value of their gold content, and a small dealer's markup.
Fact or Fiction: The South African Krugerrand is the most popularly traded of the various minted gold coins.
The Krugerrand is the most internationally recognized gold coin, and it also carries the smallest markup of the various nationally minted coins available for trade.
Fact or Fiction: When buying gold coins, investors should choose coins that weigh at least 1 ounce.
Coins that weigh at least 1 ounce tend to be a better value for investors, because dealers usually charge more markup on smaller denomination coins.
Fact or Fiction: Rare and collectible coins are ideal for investing in gold.
Rare and collectible coins, while they can make good investments in and of themselves, are not ideal for gold investors. Rare coins vary in the amounts of gold they contain, making them more difficult to trade with gold dealers.
Fact or Fiction: Stocks in gold mining companies always go up at the same time as the commodity price of gold.
Gold mining stocks usually rise when gold prices rise, and fall when gold prices fall. But because each stock and each company is different, business failures not tied to the price of gold could send a stock plummeting even during a bull market for gold.
Fact or Fiction: Exchange-traded funds in gold always increase by the same percentage as the per-ounce price of gold.
Because exchange-traded funds are backed by gold purchased by fund managers, they tend to increase and decline in price along with the price of gold as a commodity. But because the fund managers have their own expenses that cut into profits, the peaks are usually not as high for ETF shares as they are with gold.
Fact or Fiction: Gold bullion is more liquid than exchange-traded funds.
Gold bullion is actually less liquid than ETFs. In other words, ETFs can be bought and sold more easily, simply by contacting a broker. Gold must be physically taken to a dealer, and a price must be negotiated, which can take a lot more time and energy, especially if the dealer needs to verify the gold's authenticity.
Fact or Fiction: Stock prices for gold mining companies are more volatile than the price of gold.
Gold mining company stocks are highly volatile. Usually when the price of gold increases, the stocks increase by a much larger percentage. Then, when gold prices fall, the stocks fall by a larger percentage, as well.
Fact or Fiction: Mining stocks offer regular dividends to their shareholders.
Like other stocks, many mining stocks pay a regular dividend to shareholders, around 1 percent. This small stream of income makes mining stocks one of the few ways of investing in gold that provides a continuous return on investment.
Fact or Fiction: Gold options and futures typically require smaller initial investments than buying bullion.
Options and futures actually require larger initial investments than more traditional investments like buying bullion and even stocks and exchange-traded funds. Since options and futures also require much more investment expertise, the steeper barrier to entry is probably good for most investors.
Fact or Fiction: Gold options and futures are much riskier than buying and storing bullion.
Trading in options and futures is much riskier than other types of gold investment because it involves speculating in the future of the market, which is always a highly risky proposition.
Fact or Fiction: The U.S. government charges taxes on sales of gold bullion.
Investors who sell their gold bullion owe capital gains tax to the U.S. government. Other countries, like most members of the European Union, exempt sales of investment gold from taxes.
Fact or Fiction: The 50 states are prohibited by federal law from charging tax on sales of gold bullion.
The taxation of sales of investment gold is left up to the discretion of the 50 states. Many of them charge their own state capital gains tax on the proceeds that investors earn from selling off their gold.
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