Is Gold A Good Investment?
Gold has been sought after and valued for thousands of years – and remains a popular investment option for people looking for a hedge against inflation or greater portfolio diversification.
There are more ways than ever to buy gold today: You can buy physical coins or bars, or buy gold-backed securities, such as gold stocks, mutual funds and exchange-traded funds (ETFs).
But if you are wondering whether buying gold is a good investment decision or not, you need to know more than just buying gold. You need to consider where – or if – gold fits into your overall investment plan, and if it meets your asset diversification goals.
Benefits of investing in gold
People invest in gold for many reasons, from protecting their portfolio from market volatility to inflation protection. Following are some of the benefits of investing in gold:
Gold is considered a safe asset
Historically, gold has been sought as a “safe haven” compared to other assets such as stocks or real estate. That’s because gold maintains its value and liquidity even during recessions. In fact, gold often moves inversely to major changes in the stock market.
Gold can hedge inflation
When inflation is high, investors often seek gold to provide protection against rising costs of goods and services, as well as higher interest rates. While gold tends to hold its value over the long term, there are other ways to protect your nest egg from the effects of inflation, such as Treasury Inflation-Protected Securities (TIPS) and Series I bonds.
Gold improves portfolio diversification
Adding gold and other precious metals such as silver, platinum and palladium to your investment portfolio can be a way to improve the diversification of your investments. Gold can also act as a hedge against volatility as it is generally not correlated with the stock market. When a shock such as a war or epidemic hits the market, the price of gold may rise.
Gold can rally against the weakness of the US dollar
Some people invest in gold because it is a store of value that they believe will retain its purchasing power even if the US dollar depreciates. Congress ended the gold standard – the requirement that all US dollars be backed by an amount of gold held by the Treasury Department – in 1971.
Today, many mainstream economists believe that the gold standard is unnecessary to control inflation and limits the ability of central banks to be flexible in response to changing economic conditions.
Gold can withstand the volatility of stock markets
When the economy stagnates, gold may gain in value if investors panic and pull money out of the stock market and demand a rise in gold. Gold prices can also fluctuate, but if you have enough investment horizons, it can contribute to the stability of your portfolio over time.
Disadvantages of investing in gold
Gold certainly has its drawbacks, too. This is why many financial advisors recommend that investors keep no more than 5-10% of their portfolio in other assets, including precious metals (gold, silver, platinum or palladium).
Gold does not generate money
Compared to stocks and bonds, the biggest drawback to gold is that it doesn’t generate income. You don’t get the same returns as you would with most stocks, and you won’t get the same returns as when a bond is held to maturity.
Gold is not guaranteed to go up in value
Although it may seem counterintuitive, another challenge in investing in gold is that – like other asset classes – its past performance is no guarantee of its future value. This is a big reason for gold investors to consider their horizon and make sure they can wait for the price to drop.
Gold experiences price volatility
It is best to look at gold as a long-term investment due to the volatility of its prices. If you only have a few years left before drawing down your investments to cover living expenses in retirement and you can’t wait to draw down, you run the risk of gold prices falling and not getting its value when you need to sell it.
How to invest in gold
If you’ve done your research or consulted with your financial advisor and are ready to dive in, there are a few different ways you can buy and hold gold. Each has different costs and degrees of complexity, so be sure to factor in your investment expertise and risk tolerance.
Virtual gold
Holding pure gold is straightforward, but you need to account for storage costs. You can hold gold ingots, bars, coins or rounds, which resemble coins but are not official currency and do not come with distinctive designs.
You can also buy gold coins produced by a government mint or a reputable private mint. The international standard for investment grade gold bars is 99.5% purity, and gold coins are usually between 22-karat and 24-karat pure gold.
If you decide to invest in physical gold, you’ll want to make sure it’s protected in a safe deposit box or safe. Just remember before you want to buy or sell that you won’t get a retail or “face value” because sellers face markups, which can be very high if you plan to trade rare or limited edition coins.
Gold ETFs
If you want to diversify your portfolio, gold ETFs – which give investors exposure to gold without requiring them to own gold themselves – are a popular option.
You can buy shares of gold ETFs through broker accounts. There are many easy-to-use online trading platforms, but you should make sure you understand how ETF investing works first.
In addition to funds that hold the physical metal, there are gold ETFs that hold shares of companies in the gold industry, such as gold mining companies or firms that provide mining financing.
While gold ETFs can be a cheaper option than holding gold alone, there are still costs associated with investing in them. According to ETF.com, the average annual fee for gold ETFs is 0.65% (that’s $65 for every $10,000 invested).
Gold mutual funds
Mutual funds that contain shares of gold-producing companies or mutual funds are another option if you want exposure to gold in your portfolio without the hassle of holding physical gold. Gold mutual funds work like other types of mutual funds that you may already have in your portfolio.
Mutual investment can be done through a brokerage firm or an online stock trading app. Another disadvantage is that although many online brokerages today offer commission-free mutual fund trading, the fees of mutual funds are often higher than those of ETFs, as the former are often actively regulated.
Gold mining stocks
You can also buy stock in companies that mine and produce gold, or those that finance the operations of gold mining companies. If you are planning to buy shares of these companies, remember that your risk is higher holding a single stock compared to a fund that holds shares of many gold companies or is backed by physical gold.
Should I buy gold?
As with all investment decisions, when deciding whether or not to add a precious metal asset class to your portfolio you need to consider your goals, timeline and risk tolerance. Gold is useful as a store of value and as a safe-haven asset when there is volatility in the stock market, but it is not right for everyone.
The price of gold is volatile, which means it can lose value quickly and is a bad short-term investment. And you don’t earn interest or interest on gold. Overall, since gold is considered an alternative asset like cryptocurrency, it should comprise a small percentage of your portfolio – ideally 5-10% or less.
If investing in precious metals fits your time horizon and risk tolerance, the next step is to decide which gold investment is the best choice for you.
Also, you can hold physical gold in the form of bullion, coins, jewelry and collectibles. Certain types of physical gold can also be held in a gold IRA. And the easiest way for many people to add gold to their investment portfolio is to buy gold mutual funds, gold ETFs or even shares of gold mining companies through a brokerage app or a retirement account like an IRA.
If you are not sure whether buying gold is the right move for you or not, it may be best to consult a financial advisor who acts as a fiduciary (meaning they are responsible for putting your financial security first, the client) for investment advice.
Buying gold FAQ
Is gold a good investment?
Many people find gold to be a good investment because it can act as a diversifier in a traditional portfolio. It can act as a hedge during periods of high inflation and as a safe haven during periods of market volatility. But it also has no income and can be subject to price fluctuations.
There are many ways to invest in gold. You can hold physical gold such as coins or bars, or you can invest in mutual funds or ETFs that hold shares of companies in the gold industry. Alternatively, you can directly buy shares in gold companies yourself. You can also invest in gold within a gold IRA.
What is the price of gold?
Retail investors can easily find the “goal price” – that is, the most quoted price at which gold is traded today – through the COMEX exchange in the US As of March 2023, the price of gold is just under $2,000 per ounce.
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