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Investing in Gold: Things to Understand About Gold Loan Programs

Contributed by Luigi Wewege At Caye International Bank
28 September, 2020


Is there any place in the world where gold is not recognized as a valuable asset? It would be hard to find such a place. Gold holds the attention of humankind from one generation to the next and shows no signs of waning in the public's interest.

You may not realize that investing in gold is an excellent idea for individual investors, governments, and larger financial institutions. Why is gold such a worthy investment, and how can you benefit? Here are some basics that you need to know.

Gold is a Great Way to Diversify Your Portfolio

You already know that diversifying your portfolio is a smart move. When one type of holding is going through a period of decline, other assets are likely to gain in value. Still, others may continue to trundle along and generate modest returns no matter what is happening with the rest.

Choosing to include gold in the mix provides you with an asset that is more likely to generate steady returns and occasionally increase significantly in value. Since the 1970s, gold has been something that people tend to turn to when paper assets like stocks and bonds begin to fall.

Even when other investments regain ground and gold takes a slight tumble, it's usually small compared to other assets. In terms of protecting the value of your portfolio, including gold in the mix makes sense.

A Relatively Stable Commodity

While not all nations are still on the gold standard, you can bet that gold is a substantial global player. It can and does go through periods when it increases significantly in value. Like other types of investments, there are times when it tends to lower in value. But unlike some other types of investments, it never lowers to the point of becoming worthless.

Take a look at the trends of the last several decades. The 1970s was a good time to own gold and not just because everyone who was into disco wore multiple gold chains. Things settled down a bit in the 1980s and 1990s when stocks tended to take center stage, but gold was still around. The dot.com bust of the early 2000s saw a resurgence in gold that also helped quite a few people weather the recession that lasted well into the 2010s.

There's every reason to believe that gold will remain a stable commodity even as nations struggle in the face of a worldwide pandemic. In short, gold is an investment that may fluctuate in value somewhat, but it always remains a constant player.

Protecting Yourself from Inflation and Deflation

Gold has proved the ability to hold up to all sorts of economic shifts. From periods of inflation to times when deflation causes significant drops in the value of other assets, gold continues to endure. Some would say the belief of gold as being perpetually valuable is one reason why it seems to prevail no matter what happens to the world economy.

Whatever the reasons, the fact that gold holds up well in most economic climates is reason enough to make it a staple of any investment strategy. While throwing all your investment efforts behind gold is not wise, it does make sense to distribute a percentage of your assets in this direction. Doing so will, from time to time, make it easier to offset losses with other investments and allow your portfolio to remain healthy.

Gold as a Crisis Commodity

Gold has sometimes been called a crisis commodity. This reference has to do with the tendency of investors to sell off other assets when there are predictions of certain kinds of economic movements.

To weather those projected situations, investors convert assets expected to begin losing value shortly into gold holdings. The idea is that the gold is more likely to retain value during the economic crisis and possibly increase in value while it's happening or in the aftermath.

It's been proven in past decades that when confidence in other types of assets wane, commodities like gold tend to be looked upon more favorably. The fact that only so much gold is mined per year—and that it takes several years to set up and work a new mine—helps to bolster that favorable reputation. It's no wonder that people turn to gold when they expect some sort of economic crisis.

Demand Remains High Even if Production Slumps

Consistent demand has a lot to do with the reason why gold still is a popular and lucrative investment. Production per year has remained constant for some time. Given how much of the gold is held by governments or key players in the financial sector, there tend to be more investors who want in than there is gold to spread around.

The fact that the demand stays higher in the face of limited supply is another reason why it makes sense to invest in gold when the opportunity arises.

For example, Statista published figures showing that gold demand for investment purposes during the second quarter of 2020 amounted to 582.9 metric tons. This is in line with the high demand during calendar year 2019 and the projections that 2020 will be an even better year for gold.

Access to Gold Loans

You may have heard about gold loan programs. These are programs offered by domestic and offshore banks that use gold as the backing for those loans or lines of credit. Most programs allow depositors to secure loans or credit lines that amount to a maximum percentage of the gold's current market value.

Think of this as one of the safest secured loan options. If the market value of gold is holding or increasing, it's possible to enjoy lower rates of interest on the loan. You may also find that the amount of credit available increases, assuming the institution adjusts the credit line based on the latest market value.

How a Gold Loan Works Better Than Other Loan Types

With a gold loan program, you place your gold holdings in the hands of the institution. Typically, the gold is physically stored in a location where it's secure but still accessible if the institution needs it. It's not unusual for the better offshore banks to utilize facilities in Switzerland for the storage.

The gold does remain your property, but it is held in trust for as long as the loan or the line of credit exists. One of the benefits of this arrangement is that it's easier to obtain financing. With such a stable asset used as collateral, the level of risk to the lender is minimal. That's something that can work in your favor, especially if you would have difficulty receiving an unsecured loan for the same amount.

The Risks Lenders Assume with Gold Loans

Lending money or extending lines of credit always involves some risk for lenders. The possibility that the debtor could default is something that has to be taken into consideration. Should that happen, what type of expense would the lender incur to recoup the loss? This concern often determines what sort of interest rates apply to the loan.

With gold loan programs, the lender has a high probability of recouping any remaining loan balance and cover the costs of recovery. That's not always true with other types of secured loans. From this perspective, lenders who offer gold loan programs do so with a lower level of risk.

How Does a Gold Loan Program Benefit You?

That's great for the lender, but what about you? Along with greater ease in being approved for a loan, you're likely to enjoy more favorable loan terms and conditions. The result is that you will find it easier to make the loan payments and enjoy more competitive interest rates.

Consider what that means in terms of managing the loan. The installment payments are likely to be a little less, and you end up paying less interest over the life of the loan. That could make it easier for you to double up on the payments now and then and pay off the loan early with no penalties for doing so. In the meantime, most lenders of gold loans do report to the major credit agencies. That provides more positive comments to bolster your credit scores.

Where to Find Out More About Gold Loan Programs

Checking into gold loan programs is something that you should consider. However, all gold loan programs are not the same. You want to use a reputable institution with experience in gold transactions.

Caye International Bank is one such institution. Contact our team to learn more about how our gold loan program works. You'll be glad that you did.

If you are interested in or considering purchasing gold please contact Fort Kobbe the precious metal experts in Panama.




 


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