Gold bars.

Is Gold A Good Investment?

5-minute readSeptember 21, 2020

You can invest your money in everything from stocks and bonds to real estate and mutual funds. But what about gold? Is gold a good investment?

The answer is complicated.

Gold presents challenges for investors. It's a physical commodity, which means its value can rise and fall quickly according to how much demand people have for it. The increase and decrease in its value can be steep at times.

Finally, gold historically has lost value when the U.S. stock market is performing well.

But do those possible pitfalls make gold a bad investment? Not necessarily. The financial professionals polled for this story said that it's not wise to invest only in gold or gold-focused mutual funds and exchange-traded funds.

But to have gold as small part of a larger, diversified portfolio of investments can be a sound move. Gold might provide positive returns when other investments are struggling. This makes gold an option when you are looking to invest in a wide variety of asset classes.

Is Now A Good Time To Invest In Gold?

That’s the lesson for all investors: Don’t focus your portfolio on just one investment vehicle – whether gold or anything else – and instead diversify among a variety of options. This includes investing in stocks, bonds, mutual funds and other vehicles.

"The value of gold lies in the fact that it is uncorrelated to pretty much all of the factors influencing the value of other investments," says Felix Bertram, owner and investment advisor representative for Bertram Solutions in Kirkland, Washington. "Holding gold can, indeed, dampen an investment portfolio's volatility."

Bertram, though, recommends that investors be careful. As he says, the price of gold can be volatile. At the same time, trends in gold prices often last for a decade or longer, so if the value of gold falls, it could remain depressed for several years.

Because of this, Bertram recommends investors allocate only a small portion of their investment dollars to gold.

When Does Gold Perform Well?

Gold becomes more valuable, historically, when the stock market is performing poorly. A good example is the period between November of 2007 and the end of May of 2009. During this time, the S&P 500 index dropped by 36%. The price of gold, though, rose 25% during this same stretch.

That’s an example of why gold can be a solid investment: It has historically done well when the stock market is struggling. Gold, then, can offer a bit of protection for investors worried about the swings of the stock market.

Terry Hanlon, president of Addison, Texas-based Dillon Gage, a company that trades precious metals, says gold proves its worth during tougher economic times.

"As we saw in the last recession, physical gold proved to be a rewarding investment and nearly tripled in value while stock markets grew at a slower rate and real estate mostly sagged," Hanlon says.

If you lived on either U.S. coast during that time, Hanlon says you were better off holding gold, its value exceeding $1,800 an ounce, than you were owning a second or third home.

Hanlon says that physical gold is one of the few financial assets that doesn’t rely on an issuer's promise to pay. That's one of the reasons why it’s considered a safe haven during economic downturns.

"Portfolios containing gold are generally more diverse and have fewer swings in value than those that omit it," Hanlon said. "Gold is less volatile than most individual commodities and many equities."

Gold Vs. The Stock Market

Not everyone, though, considers gold a good way to diversify a portfolio. Critics argue that gold's returns just aren't high enough, and that consumers can find better ways to build a diverse mix of investments.

"If you have a long-time horizon, you should not invest in precious metals," says Robert Johnson, professor of finance at the Heider College of Business at Creighton University in Omaha, Nebraska. "The long-term returns are far below those of equities."

Johnson points to some numbers: At the end of 1925, the price of an ounce of gold was $20.63. At the end of 2018, an ounce of gold sold for $1,283.10. During that 93-year period, gold returned 4.54% compounded annually.

Over the same period, the compound annual rate of return of a diversified portfolio of large stocks was 10%. That same $20.63 invested in gold at the end of 1925 would have grown to $145,888 if invested in the S&P 500.

Johnson says that investing in a diversified mix of small stocks provides even stronger returns. The compound annual rate of return of small stocks during that same 93-year period was 11.8%. The $20.63 investment would have grown to $660,065 at the end of 2018.

How Do You Invest In Gold?

How do you make gold part of your investment portfolio? There are several ways.

If you want physical gold, you can purchase jewelry made of the metal and hope that the value rises after your purchase. Of course, you’ll have to deal with high mark-ups when buying jewelry. Dealers will charge you more so that they can earn a profit.

You could also purchase physical pieces of gold in the form of collectable coins or bullion. This isn't always easy to acquire, and you’ll again have to pay high mark-ups.

You can invest in gold certificates offered by companies that have purchased their own gold. Or you can invest in stocks, mutual funds and exchange-traded funds that are focused on gold mining or gold. Companies such as Fidelity and Goldcorp offer these stocks.

As with any investment, there are risks. If the price of gold falls, the value of your gold-based mutual funds or stocks can drop quickly, too.

How Much Gold Should You Include In Your Portfolio?

While gold can help you diversify your investment portfolio, most financial experts advise that you devote just a small portion of your investments to the metal, usually no more than 10%.

Others, though, argue that it shouldn’t make up any percentage of your investments.

Kenny Gatliff, certified financial advisor and portfolio manager and financial advisor with Keystone Wealth Partners in Phoenix, recommends that clients avoid gold as an investment.

"Gold does not have any intrinsic value and is, therefore, a purely speculative investment," Gatliff says.

Gatliff says the history of gold is highlighted by infrequent large spikes in value followed by long periods of low or negative real returns.

"Despite its history, gold is often presented as a good diversifier and hedge against inflation," Gatliff says. "But it has also shown historically to be highly volatile with significant downside risk. High volatility with low expected returns is not a recipe for a good addition to a diversified portfolio or a good hedge against inflation."

The key takeaway? It’s important to do your research when learning how to save and invest. And if, after doing this, you decide to make gold part of your investment portfolio, make sure to do so in moderation. This precious metal might protect you against fluctuations in the value of your other investments, but making it too large of a percentage of your portfolio might be a financial mistake.

For more information about investing, visit the Rocket HQSM personal finance Learning Center.

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