Is Gold a Good Investment?
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.
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 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 a 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 soars 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 to 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.
You can 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 typically between 22-karat and 24-karat pure gold.
If you want to own physical gold, factor in the cost of storage. You’ll want to ensure that it’s secured in a safe deposit box or a safe. Just keep in mind before you want to buy or sell that you won’t get the retail or “spot price" because dealers tack on markups, which can be particularly high if you plan to trade in 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 the gold themselves — have become popular.
You can buy shares of gold ETFs via brokerage accounts. There are plenty of user-friendly online brokerage platforms out there, but you should make sure you understand how ETF investing works first. In addition to funds that own the physical metal, there are gold ETFs that hold stocks of companies in the gold industry, such as gold mining companies or firms that provide financing for mining operations.
While it can be a cheaper option than holding gold on your own, there are still costs associated with investing in a gold ETF. According to ETF.com, the average annual fee for gold ETFs is 0.63% (that's $63 for every $10,000 you have invested).
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 mutual funds operate like other types of mutual funds you might already have in your portfolio.
Mutual fund investing can be done through a brokerage firm or an online stock trading app. One downside is that even though most online brokerages today offer commission-free mutual fund trades, fees for mutual funds tend to be higher than fees for ETFs, since mutual funds are often actively managed.
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 that 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 dividends 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.
If precious metals investing fits with your time horizon and risk tolerance, the next step is determining which gold investments are the best choice for you. Again, you can hold physical gold in the form of bullion, coins, jewelry and collectibles. Certain types of physical gold can even be held in a gold IRA. And a simpler way for many people to add gold to their investing portfolio is to buy gold mutual funds, gold ETFs or even stocks of gold mining companies through a brokerage app or a retirement account such as an IRA.
If you’re unsure whether or not buying gold is the right move for you, it might be best to consult a financial advisor who serves as a fiduciary (meaning that they are obligated to prioritize the financial security of you, the client) for investment advice.