The Golden Dilemma: Is Gold a Wise Investment Strategy for You?

Why Gold Has Been Sought After for Thousands of Years

Gold has been sought after and valued for thousands of years — and it’s still a popular investment option for people seeking a hedge against inflation or greater portfolio diversification.

More Ways to Buy Gold Than Ever Before

There are more ways than ever to buy gold today: You can purchase physical coins or bars, or buy gold-backed securities, like gold stocks, mutual funds and exchange-traded funds (ETFs).

But Is Buying Gold a Good Investment Decision?

But if you’re wondering whether or not buying gold is a good investment decision, you need to know more than just how to buy gold. You need to consider where — or if — gold fits into your overall investment strategy, and if it meets your goals for asset diversification.

Advantages of Investing in Gold

People invest in gold for many reasons, from protecting their portfolio from market volatility to hedging against inflation. The following are some of the advantages of investing in gold:

Gold is Considered a Safe-Haven Asset

Historically, gold has been sought after as a “safe haven” compared to other assets like stocks or real estate. That’s because even during economic downturns, gold retains its value and liquidity. In fact, gold often moves inversely to big swings in the stock market.

Gold Can Hedge Against Inflation

When inflation is high, investors often seek out gold to provide a protection against rising costs of goods and services, and higher interest rates. Although gold tends to hold its value over long stretches of time, there are also other ways to protect your nest egg from inflationary effects, such as Treasury Inflation-Protected Securities (TIPS) and Series I bonds.

Gold Enhances Portfolio Diversification

Adding gold and other precious metals like silver, platinum, and palladium to your investment portfolio can be a way to enhance the diversity of your investments. Gold can also act as a hedge against volatility since it generally does not move in tandem with the stock market. When shocks like a war or pandemic roil the market, the price of gold might actually rise.

Gold Can Hedge Against U.S. Dollar Weakness

Some people invest in gold because of its store of value and believe it will maintain its purchasing power even if the U.S. dollar falls in value. Congress eliminated the gold standard — a requirement that every U.S. dollar be backed by a set amount of gold held by the Treasury Department — in 1971. Today, most mainstream economists believe the gold standard is not necessary to control inflation and limits the ability of central banks to be flexible in response to changing economic conditions.

Gold Can Hedge Against Stock Market Volatility

When the economy is volatile, gold may gain in value if investors panic and pull money out of the stock market and demand surges for gold. Gold prices can be volatile as well, but if you have a sufficient investment horizon, it can contribute portfolio stability over the long haul.

Disadvantages of Investing in Gold

Gold certainly has its drawbacks, too. That’s why many financial advisors recommend that investors keep no more than 5-10% of their portfolio in alternative assets, including precious metals (gold, silver, platinum, or palladium). The following are some of the disadvantages of investing in gold:

Gold Doesn’t Generate Income

Compared to stocks and bonds, a major drawback to gold is that it is not income-generating. You don’t earn dividends the way you can with many stocks, and you also won’t earn the yield you get if you hold a bond to maturity.

Gold Isn’t Guaranteed to Increase in Value

Although it might seem counterintuitive, another drawback to investing in gold is that — just like other asset classes — its past performance is no guarantee of its future value. This is a major reason gold investors need to consider their time horizon and ensure they can wait out price drops.

Gold Experiences Price Volatility

It’s best to consider gold a long-term investment due to volatility in its prices. If you only have a few years before you need to start drawing down your investment portfolio for living expenses in retirement and can’t wait out a drop in gold prices, you run the risk that gold prices fall and don’t regain their value by the time you need to sell.

How to Invest in Gold

If you’ve done your research or consulted with your financial advisor and are ready to take the plunge, there are several different ways you can buy and hold gold. Each has different expenses and degrees of complexity, so be sure to factor in your investing expertise and risk tolerance:

Physical Gold

Holding pure gold bullion is straightforward, but you need to account for the expense of storage and dealer markups if you choose this form of gold. You can hold gold ingots, bars, coins, or rounds, which are similar in shape to coins but are not legal currency and don’t come with distinctive designs.

Gold ETFs

If you want to diversify your portfolio, gold ETFs — which give investors exposure to gold without requiring them to own the gold themselves — have become popular.

Gold Mutual Funds

Mutual funds containing the stocks of companies that produce gold or finance production are another option if you want exposure to gold in your portfolio without the hassle of holding physical gold.

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 plan to buy shares of these companies, keep in mind that your risk is higher holding just a single stock versus a fund that holds shares of multiple gold companies or is backed by physical gold.

Should I Buy Gold?

As with all investment decisions, when deciding whether or not to add the asset class of precious metals to your portfolio, you need to consider your goals, timeline, and risk tolerance. While the benefits of investing in gold include its use as a store of value and its status as a safe-haven asset when there is volatility in the stock market, it’s not right for everyone.

Keep in mind that the price of gold does fluctuate, meaning it can quickly lose value and is a poor short-term investment. You also don’t earn income or interest on gold. Overall, since gold is considered an alternative asset like cryptocurrency, it should only comprise a small percentage of your portfolio — ideally 5-10% or less.
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