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Since Egyptians first began smelting it more than 4,000 years ago, gold has symbolized wealth and status. Today, we use this precious metal to produce jewelry, electronics and wealth within investment portfolios. There are reasons why gold has maintained its value over thousands of years, but it helps to have a clear picture of how gold performs as a long-term investment before learning how to buy gold and deciding if it belongs in your portfolio.

Read on to familiarize yourself with the advantages and disadvantages of investing in the precious metal to determine if it will help you reach your financial goals.

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Is gold a good long-term investment?

Like any long-term investment, there is no way to predict how gold will perform in the future. Throughout the course of history, gold has proven to be a reliable and durable investment that canmaintain its value over time, but is gold a good investment?

One major drawback is that gold is an asset that does not generate dividends, which can help your wealth grow over time through compounding. Although gold is a store of value, you cannot use it for cash flow, as you might with a basket of dividend-generating stocks, unless you sell it. Most investment experts do not consider precious metals to be ideal for short-term investing, but the inclusion of precious metals such as gold can diversify your portfolio.

Gold is considered a safe haven during market volatility and an investment that offers protection against inflation. Often when the stock market declines, the demand for gold increases, raising its prices. Because of this inverse effect, investors may pivot to gold during a recession to protect their assets. Gold is both a currency and a commodity, but it certainly comes with risks, including price fluctuation.

The average gold investment return

Gold is not an asset that generates income, but it can function as a store of value when its price appreciates over time. The worldwide average annual return of gold between 1971 (the year the U.S. stopped linking the price of gold to the dollar) and 2022 was 7.78%, but there can be considerable fluctuations from year to year. For example, the annual return of gold in 2022 was only 0.4%.

As with other precious metals, you only profit from gold once you sell it, since precious metals are not an income-generating asset. The profit you earn when you sell your gold will depend on how you purchased the commodity, as there are costs associated with the various ways investors can buy and hold gold.

Ways to invest in gold include purchasing the physical metal or buying stocks of gold companies, either by purchasing individual stocks or buying shares in mutual funds or ETFs that invest in gold companies via an individual brokerage account or gold IRA. For example, if you buy physical gold, you may need to pay annual fees to store and insure your gold. If you invest in gold companies or funds, you may have to pay a fund management fee.

Gold performance over time

The price of gold has risen over roughly the past half-century, but this trajectory has moved in fits and starts. Until 1971, the U.S. adhered to the gold standard, which pegged the price of gold to the dollar. Today, the U.S. dollar and the price of gold are uncoupled, and the price of gold often falls during periods when the dollar strengthens. This inverse relationship is why many investors use gold as a counterbalance to inflation and unpredictable economic events.

Gold prices have risen over the last 30 years

The price of gold has significantly increased over the past 30 years. Today, it’s not uncommon to see gold priced at more than $2,000 per ounce, but in 1993 you could buy gold for less than $400 an ounce. Because gold often performs better in times of economic uncertainty and stock market volatility, gold prices soared during and after the Great Recession. Market fears about a lackluster economic recovery between 2010 and 2011 caused gold prices to increase by 50.6% and rise above $1,800 per ounce.

More than a decade later, the global COVID-19 pandemic rocked financial markets, plunged stocks into a freefall and sent the price of gold soaring. In August 2020, gold shot up to an all-time high of $2,074 per ounce.

Precious metals act as a hedge against inflation

Periods of high inflation, when prices of all sorts of goods and services increase rapidly, are challenging for investors. Investing in precious metals like gold can help you retain the value of your savings during periods of high inflation by mitigating the erosion of purchasing power that takes place when prices spike.

Gold is a safe haven in uncertain political and economic times

Other political pressures and situations that negatively affect the economy also have implications for gold investors. Policymakers can make changes regarding taxes, international trade and interest rates, which can all create stock market volatility. War and geopolitical unrest in other countries can also negatively affect global economic activity.

While all of these issues can drive down stock prices, they can cause gold prices to rise, because investors seeking stability are more likely to turn to safe-haven assets such as precious metals during periods of uncertainty.

Physical gold’s long-term forecast

It is impossible to predict the long-term performance of any investment asset based on its past performance. Still, there are some factors to consider when deciding between investing in physical gold — that is, gold bullion or gold coins — versus gold stocks. On one hand, if you buy tangible gold, you don’t need to pay the same ongoing management fees you would with an investment in a gold mutual fund. And although the price of gold can be highly variable from year to year, it’s likely to retain its intrinsic value as a commodity in spite of future economic or political shocks.

The possession of physical gold presents some drawbacks as well, though. It does not generate income and you have to pay for storage (if it is held in a safe-deposit box at a bank or in a storage facility) and insurance on an ongoing basis to safeguard against loss or theft. Plus, in the event that you want to liquidate your supply of gold quickly, you may need to settle for a lower price than you want, as gold dealers may offer you a marked-down price.

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Benefits of long-term investment in gold

Depending on your specific situation, there could be reasons to invest in gold. Some of gold's major benefits include using it as a hedge against inflation and diversifying your portfolio. It also can be appealing to investors who prefer physical metals to paper assets. But gold is not an appropriate short-term investment because it can experience price volatility. And keep in mind that financial advisors recommend keeping no more than 5-10% of your portfolio in precious metals.

Hedge against inflation

If you’re not prepared, inflation can erode the value of your savings and investments. Historically, the precious metals asset class has been resistant to inflation. While paper currency depends on the actions of central banks, the global economy and the Federal Reserve, precious metals are physical assets with intrinsic value, meaning they have worth independently of those factors.

Diversifies investment portfolios

One of the most common tips for investors is to diversify your portfolio. If you want to purchase stocks, bonds, ETFs or other investments, you might want to consider gold, as well.

Diversifying your portfolio with precious metals can help you maintain stability because this asset class performs differently than investment options like stocks and bonds. Gold can reduce overall losses to your portfolio during periods of economic downturn because it isn’t bound by the movement of the stock market. Keep in mind, though, that while the value of gold may increase over time, it isn’t an investment that will grow your portfolio because it doesn’t generate income like stocks or bonds can.

Maintains value over time

While the performance of gold can be volatile from year to year, it has proven to hold its value over long periods of time. Gold is also an asset that is both accessible and liquid, meaning you can buy and sell it easily.

Purchasing a small percentage of gold at a young age, whether in stocks, ETFs or mutual funds, can act as a diversifier to help balance your portfolio.

Can be physically held

Some investors want to buy an asset they can physically hold — and gold allows them to do that. If you feel more comfortable putting your money toward something that you can actually see and keep at your house, unlike stocks, you might want to look into how to buy gold bars and coins.

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Key takeaways

  • Whether gold is a good long-term investment for you depends on your financial goals. If you’re unsure, consult with a financial advisor for guidance about the gold market.
  • Gold can help you weather inflation and economic instability. It is considered a safe haven investment and its value often moves inversely to other asset classes like stocks and real estate.
  • Unlike some other assets, gold doesn’t generate income. Purchasing physical gold will also require you to find secure storage to safeguard against loss or theft.
  • Whether you buy physical gold or gold-related stocks or funds, investing in gold is a common strategy for portfolio diversification.
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