The price of gold often rises in times of crisis and higher-than-usual inflation, making the yellow metal attractive to investors seeking securities that can endure economically challenging times. Cash and several other asset classes, by contrast, lose value over time due to inflation. Gold is also more liquid than real estate and investments such as retirement accounts. However, the reality of investing in gold is more complex than it may seem at first.
Consider working with a financial advisor as you consider adding gold to your portfolio.
Reasons Gold May Be a Good Investment
There are several reasons you might consider investing in gold, regardless of economic conditions. Such is the reason gold has been a popular investment for thousands of years; it has many attractive and unique qualities.
Gold Can Preserve Wealth
One of the best features of gold is that it preserves wealth. Gold has been a valuable resource for thousands of years, and multiple civilizations and empires have come and gone. Some of those people had their own currencies which today only have historical value. Gold, on the other hand, still has monetary value and can easily be bought and sold.
Gold Can (Sometimes) Protect Against Inflation
Gold is a popular investment among those who lose confidence in governments and their respective currencies. But it can also be a good store of value during periods of inflation. There are many reasons this can occur. For instance, consumers may not want to spend their money on goods when prices are rising rapidly, so they decide to purchase gold instead until inflation rates stabilize.
Another reason gold often performs well during inflation is due to the fact that gold is priced in U.S. dollars. Thus, when there is inflation in the U.S., the dollar weakens, making it cheaper for those with foreign currency to buy gold. This may cause the price of gold to increase. Hence, gold becomes a better way to set money aside than cash.
The World Gold Council noted in July 2021 that gold has a “surprisingly poor” correlation to the consumer price index. Since the 1980s, there has only been one time when gold has posted strong returns amid surging inflation (4% or more): a short period between 2007 and 2008 during the financial crisis.
Gold Helps You Diversify
Another benefit of gold as an investment is diversification. Reducing risk is key to a successful long-term investing strategy, and gold is not positively correlated with stocks, bonds or real estate. While it’s possible to build a diverse, relatively low-risk portfolio with just these three assets, adding some gold can round out your portfolio and reduce risk even further. Regardless of how the economy is doing, it’s always a good idea to reduce your risk to an acceptable level.
The Issues With Gold as an Investment
There’s plenty to like about gold, but it isn’t perfect by any means. As mentioned in the previous section, gold’s performance isn’t positively correlated with some of the most common forms of investment, which allows you to reduce your overall risk. But this is not to say that gold always increases in value.
One look at a 100-year historical price chart for gold quickly makes this apparent. For instance, the price was nearly $550 in 1915. But in 1970, the price dropped to under $270. Keep in mind that these prices are inflation-adjusted. The price of gold never again went quite as low as it did in 1970. However, it shot up to nearly $2,500 in 1980, and by 2001, it was below $450. It’s also worth noting that over the past 100 years, the Dow Jones Industrial Average has seen growth more than six times greater than gold.
You can continue looking at these peaks and valleys, but it helps to understand just how much the price of gold can fluctuate, especially if you are thinking about investing. Even today, the price is not as high as it was in 1980.
Ways to Invest in Gold
There are many different ways to buy gold if you’re so inclined. For starters, you aren’t limited to buying physical gold these days. In fact, the number of ways to invest in gold is similar to the myriad ways to invest in stocks.
Gold bullion is one of the first things that comes to mind when we think about gold. Bullion is physical that has been refined into ingots, bars or coins. You can buy gold bullion online through licensed retailers. Due to the high price of gold, it’s best to deal only with reputable retailers.
Another option is to invest in gold stocks, which are usually gold mining companies; this approach comes with its own set of pros and cons. For instance, gold stocks sometimes pay dividends, allowing you to earn consistent income. However, investing in a single company can be quite risky. Before considering this investment, you should have a thorough of the company’s business model and its fundamentals.
Gold Mutual Funds and ETFs
One way to reduce the risk of investing in gold stocks is to invest in gold mutual funds and ETFs instead. Gold ETFs such as GOEX invest in groups of gold mining companies to diversify your investment. Other gold ETFs, like GLD and IAU, are benchmarked to the gold price itself, giving you a less cumbersome way to invest than owning physical gold. Plus, gold ETFs and mutual funds even pay dividends in some cases, giving you the best of both worlds.
Like many other types of assets, it’s possible to buy gold futures to speculate on potential price changes. Futures allow traders to make large profits in the short term, but they can also be quite risky. Hence, futures are considered an advanced form of trading.
Gold offers many unique advantages for investors, such as its ability to preserve wealth and the fact that its performance is not tied to the performance of other asset classes like stocks and real estate. Geopolitical and monetary crises also enhance the appeal of gold. It is also highly liquid compared to other commodities and can be a good way to round out your portfolio. But gold is not without its own set of risks, including its price volatility.
Tips on Investing
- Knowing if investing in gold makes sense for you and, if so, how exactly to go about that can be confusing. That’s where a financial advisor can offer valuable insight and guidance. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Never invest in any asset without fully understanding its risk vs. return relationship. Investments that seem good initially can turn out to be too risky to be worthwhile.
- Remember not to make investment decisions based solely on what is happening today. Using a long-term investing strategy will help you build a portfolio that can sustain itself in the long run.
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