Introduction to Gold Investing
For thousands of years, gold has been both a currency and a store of value. Although investing in gold has its pros and cons, it’s easier than ever to add to your portfolio. In addition to owning physical gold coins and bars, you can buy gold exchange-traded funds (ETFs), mining stocks, and futures contracts.
The Role of Gold in Investing
Whether gold (and other precious metals such as silver and platinum) remain relevant in today’s investing world depends on your view. Some see gold as an insurance policy against stock market volatility and a reliable asset during times of severe economic instability. Others see it as a “barbarous relic,” as famed economist John Maynard Keynes put it—no longer useful in an age of cryptocurrencies and offering less chance of returns over time because it pays no interest or dividends.
Historical Performance of Gold
Gold had brief periods of huge gains in recent decades, but there were also long stretches when it was outperformed by U.S. stocks. For example, anyone who invested in gold in 2011, instead of putting money in stocks, would have gotten crushed over most of the following 10 years as U.S. stocks surged. On the other hand, gold performed well during the COVID-19 pandemic when investors worried how companies would fare during shutdowns.
Including Gold in Your Portfolio
You’ve probably seen ads on TV hawking gold or silver. Some financial experts suggest precious metals can be part of a diversified portfolio as long as they’re in small amounts of about 5% to 10% of asset allocation. So, should you have gold or other precious metals in your portfolio to protect against inflation or provide diversification? The answer is a firm maybe.
Gold as an Alternative Investment
Gold is traditionally considered an alternative asset to investments like stocks and bonds, and it can provide diversification. Studies by gold industry group World Gold Council show the yellow metal is correlated to stocks when equity prices are rising, but loses this correlation during periods of market stress.
Gold as an Inflation Hedge
Gold actually has a mixed record on beating inflation. During the period of high inflation in the 1970s, gold prices surged until the Federal Reserve sharply raised interest rates to tamp down rising prices. Rising rates tend to strengthen the dollar, weighing on gold prices.
How to Buy Gold and Precious Metals
There are several ways to invest in gold, each with pros and cons.
- Physical gold bars and coins. This is the traditional way to buy gold. Investors can buy through the U.S. Mint or reputable precious metals dealers.
- Exchange-traded funds. Investors who want exposure to gold prices but don’t necessarily want to own the physical metal can buy exchange-traded funds, or ETFs.
- Gold futures. Futures are exchange-traded derivative contracts where a buyer and seller agree to transact a specified amount of gold at a set price on a future date.
- Gold mining stocks. These are shares in companies that mine metal.
Pros and Cons of Owning Gold, Silver, and Other Precious Metals
Like any investment, gold has benefits and drawbacks.
- Benefits:
- Can be considered an insurance policy or a safe haven investment, one that’s less likely to fall in value when stocks tumble.
- Can be a store of value over time.
- Physical bars and coins can be used as mediums of exchange.
- Drawbacks:
- Physical gold can be expensive to buy or sell, as it’s subject to dealer premiums.
- Physical gold and gold-backed ETFs are subject to a higher tax rate than traditional assets, even when held long term.
- Gold pays no dividends or interest.
Conclusion
Gold can play a small role in portfolios as a diversifier among other traditional assets, but investing in gold requires you to consider why you want to own it and whether it will help you reach your financial goals. By understanding the role of gold in investing, its historical performance, and the pros and cons of owning it, you can make an informed decision about whether gold is right for you.
