Gold. It has brought kings to their knees and ships to their graves. Wars have been waged over this precious metal. But is it really worth its weight in gold now?
Gold was initially used as a form of standardized currency around 560 BC to simplify trade. Cut to the early 1900s and it was transitioned out. While it is often depicted as a symbol of wealth in folklore and older films and literature, in today’s world, it doesn’t hold the same weight that it once did.
Gold investments today
In the present era, gold investments are great to diversify your portfolio, but it lacks the liquidity that comes with investments in stocks and bonds. Many people invest in gold because on the surface it seems to weather market crashes significantly better than stocks do. In fact, the price of gold tends to increase with every market crash and has shown a marked increase in its value with each passing year.
While holding physical gold as an investment can come with a number of inconveniences, an alternative that most investors choose is buying shares in a gold mining company. Gold tends to fare better during recessions.
Furthermore, when the value of the dollar is on a decline and with inflation rising, gold tends to offset both of these scenarios. Despite this advantage, most experts suggest making very measured investments in gold.
How to invest in gold
Physical gold
Gold bullion offers investors direct ownership of physical gold. When you think of gold bullion, you almost instantly imagine gold bars, much like those depicted in vintage films with cowboys and sheriffs. However, bullion refers to the purest form of gold that has been certified.
The primary issue with holding physical gold is that it’s illiquid. If your entire investment is made in a bar of gold, selling off a portion of it is difficult, if not impossible. Some gold owners choose smaller sized pieces of gold for an easier sale. But the problem with liquidity still remains.
Gold funds
Gold funds refer to the shares owned in gold-related businesses. This could be anything from gold mining companies to companies that process gold.
You can invest in mutual funds and ETFs that offer shares in gold companies. While you don’t actually own physical gold or shares in the company, you do have the liquidity that comes with investing in an ETF or a mutual fund.
Gold stocks
You can buy stock in gold mining companies and be part owner of that company. But as is the case with ownership in a company, it comes with a number of risks as well. Again, you cannot physically own the gold that is mined but you do have the advantage of liquidity.
Gold futures
Gold futures are agreements to purchase or sell gold at a specified date in the future. Futures offer investors liquidity and come with the added benefit of having zero management fees for the investment. However, commissions charged by brokerage firms still apply. With gold futures, the agreement is what is actually traded on the exchange.
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Advantages of investing in gold
1. Growth investment
Gold is typically better suited for investors who are looking for growth as opposed to income. The price of gold stocks fluctuates based on the price of gold. A notable aspect of the rise in gold prices is that it significantly increases the price of gold stocks even when the price increase is minimal.
2. Diversifying your portfolio
As stated earlier, gold can be a good investment to diversify your portfolio. When combined with investments in stocks and bonds, it can decrease your overall risk in a volatile market.
3. Inflation hedge
Gold has historically proven to serve as an equalizer during inflation. The price of gold tends to increase with the rise in the cost of living.
This has been particularly true in times when there were extreme crashes in the stock market and the value of gold continued to climb. This has proven to be true over half a century whenever there is a drop in the value of fiat currencies.
Is it wise to invest in gold?
When assessing the performance of gold against the S&P 500 between 2016 to 2021, gold has not performed that well. The S&P Index generated close to 100% in returns while gold only generated 42.5% in returns in the same time frame.
However, in the time frame between 2002 and 2012, there was a price appreciation of 441.5% for gold while the S&P 500 had appreciated only by 58%.
There is no clear answer to whether gold is a good investment. Like all investments, there are both advantages and disadvantages to investing in gold. As is the case with any kind of investment, buying when the prices are low and selling when prices are high has proven to be the way to go.
However, most experts discourage investing in gold for fear of market fluctuations. Instead, they suggest riding out market crashes and focusing on the future. Market volatility is a common feature of the stock market and panic buying gold might do more harm than good.
