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Home>Daily Capital>Investing & Markets>Is Gold a Good Investment?

Is Gold a Good Investment?

Gold is one of the most storied metals in all of history. Over the course of thousands of years, it has been used to create items such as jewelry, idols for worship, coinage, sculptures, decoration for buildings, monuments, statues and more. Today, money is used as a medium of exchange and as a store of value as well as to create jewelry and other artifacts.

So, is gold a good investment? Let’s take a look at whether you can make money investing in gold, whether there are other investments you may want to consider instead, how to invest in gold and the pros and cons of investing in this precious metal.

Can You Make Money Investing in Gold?

Over the course of history, individuals have scrambled to purchase the shiny metal, particularly in times of economic uncertainty, especially during recessions and periods of high inflation. But gold prices have also experienced massive downside volatility at various times over the last century. Gold is not “safe” by any means — the price of gold went down by ~83% from 1980 to 2000 in real terms. In our view, it’s best to avoid concentrating too much of your portfolio in any one asset, including gold.

Ultimately, you can make money investing in gold but it’s never a guarantee — just as it is with any investment. It’s a good idea to consider all of the different types of investment that make complete sense for your particular needs.

What Investment is Better than Gold?

There are many alternatives to investing in gold. Personal Capital believes in a diversified investment approach with smart weighting. We focus on six asset classes, including U.S. stocks, international stocks, U.S. bonds, international bond debts, alternative assets and cash:

  • S. stocks: U.S. stocks, instruments of growth, are shares of companies located in the United States.
  • International stocks: International stocks are those of companies housed outside of the United States and include emerging and developing markets. They provide diversification from U.S. stocks.
  • S. bonds: U.S. bonds are debt issued in the United States, mainly through corporations and governments. U.S. bonds offer diversification with stocks and provide a hedge against inflation.
  • International bonds debt: International bonds come from governments and corporations issued outside the United States and are great options for income and diversification benefits.
  • Alternative assets: Alternative assets can help combat diversification and serve as a hedge against inflation and can be gold, real estate or other types of commodities.
  • Cash: Cash can exist in a high-yielding cash management account.

Personal Capital’s investment strategy determines the best asset class mix for you using modern portfolio theory (MPT) based on equal sector and style weighting, diversification and adequate stock selection. We create a portfolio and help choose long-term investments, including gold, to maximize diversification to find the best representation for you without trying to “pick winners.”

Personal Capital also implements tax optimization strategies through tax allocation, tax-loss harvesting and tax efficiency. Tax-loss harvesting refers to selling securities at a loss to turn an unrealized loss into a realized loss. Losses can be used to offset gains by deferring the payment of taxes.

We also consider the most tax efficient methods possible. Different types of investments have various tax implications. Personal Capital portfolios are built on a combination of individual stocks and ETFs. Personal Capital excludes mutual funds and puts a priority on the most tax-optimized investment opportunities available.

We also ensure that you have a disciplined rebalancing strategy, which realigns the weightings of your portfolio by buying or selling to keep the original asset allocation intact. It keeps portfolios focused on long-term goals and enhances risk-adjusted returns — ultimately, the best rebalancing strategy can help investors save money over time.

Is it Better to Save Cash or Gold?

Deciding whether to stick to saving cash or investing in gold depends on your individual investing goals. It’s a good idea to look at your portfolio from a holistic approach. Consider your goals, investment timeline, risk tolerance and the diversification of your current portfolio.

The types of investments you already have may help you decide whether to invest in gold or save cash instead.  And above all, remember that FDIC-insured cash is the only asset that doesn’t change in value nearly every day.

It’s also worth considering whether you want to invest in specific companies, which can continue to pay out cash in the form of dividend payments. Warren Buffett once said, “It’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage.”

How to Invest in Gold

Investors can invest in gold in three primary ways: through the physical asset, by purchasing mutual funds or exchange-traded funds (ETFs), stocks, or trading futures or options. Let’s go over the definitions of each of these investment types.

  • Gold bullion: Gold bullion refers to the physical asset of gold, in its metal form. You can purchase bullion from a precious metals dealer or from a bank or brokerage in some cases. You can purchase bullion in the form of coins, jewelry or even bricks. Ultimately, it’s important to purchase from a reputable dealer and keep your bullion safe, preferably in a bank safe deposit box.
  • Gold ETFs and mutual funds: Instead of having to store gold or getting insurance on it, you may want to consider holding gold in another way — through ETFs. ETFs are funds that offer liquidity and which trade on exchanges and track a specific index. Mutual funds professionally managed baskets of securities pooled together for investors to purchase, typically stocks, bonds or other types of securities. ETFs and mutual funds may invest in bullion and in shares of publicly traded companies engaged in gold mining or refining, for example.
  • Gold stocks: Gold mining stocks are shares of a company — typically a gold mining company — that you can invest in and own a portion of the company. You can buy as many shares as you want, and it’s a good idea to consider companies that have strong capital and profits.
  • Gold futures: Futures refer to a financial contract between a buyer and a seller in which the buyer agrees to purchase an asset from a seller based on an agreed-upon price set at a specific date in the future. In this case, the buyer and seller agree on a price, the amount of gold and the future delivery date. Put simply, the buyer makes an initial payment and then will complete the final payment at the later date. Buyers and sellers can buy or sell gold futures contracts on the New York Mercantile Exchange (NYMEX) or Tokyo Commodity Exchange.
  • Gold options: A gold option is a derivative in which physical gold or futures on physical gold are the underlying asset. The contract involved in gold options is an agreement between two parties. These contracts represent the right or obligation) to buy or sell the gold at a specific price, known as the strike price, byan expiration date. You can use options whether you think the price of gold will go up or down, though remember that options are extremely risky and can lead to large or even unlimited losses.

Pros and Cons of Investing in Gold

What are the pros and cons of investing in gold? Let’s take a look at the possible benefits of investing in gold.

Pros 

First, let’s take a quick look at the potential benefits of investing in gold.

  • Holds value: Gold can hold value and that’s evident in the fact that it has been a staple for thousands of years. It’s true that gold’s price can be volatile and yo-yo up and down, but when you take a look at how gold values move over a number of years, it’s clear that it holds value compared to major currencies.
  • Often non-correlated: Gold prices can sometimes move in a different direction than other asset classes like stocks or bonds.  Holding a portfolio of non-correlated assets can increase diversification.
  • Offers diversification: Diversification means that you vary the investments that you invest in. When you invest in a wide variety of assets, such as stocks, bonds, mutual funds, ETFs and other securities, gold can add to the diversification in your portfolio. Adding a small allocation to gold can help you reduce risk in your portfolio.

Cons

Now, let’s take a look at the possible downsides of investing in gold.

  • Storage issues: If you choose to invest in gold bullion, you’ll need to store it. Unlike a nonphysical asset like an ETF or stock, gold bullion bars are heavy and large and must be stored in an area protected against high humidity and fluctuating temperatures.
  • Liquidity issues: If you hold gold bullion, you may have liquidity challenges. This means that you can’t just sell gold bars immediately, unlike in the case of holding an ETF or mutual fund. You’ll have to find a person or entity to pay you for the gold. If you know you’ll need immediate cash in the future, you may want to stick to the stock market because you may be able to reap dividend rewards and ongoing cash flow that you can live on.
  • Price volatility: Over short, intermediate, and sometimes very long time periods, gold can be extremely volatile.

The Bottom Line

Whether you’re a first-time investor or an experienced trader, gold may hold some appeal, but despite lots of marketing out there, it is very much not a safe asset. It’s always worth considering the risk of holding too much of your portfolio in any one asset, including gold, as well as your preferences such as risk tolerance, investment time horizon and more. Ultimately, you want to increase your returns and keep your risk at a comfortable level. Personal Capital can help you match your asset allocation to your risk tolerance and other factors that help you put together a solid portfolio for your needs.

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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

Personal Capital compensates Melissa Brock (“Author”) for providing the content contained in this blog post. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Melissa Brock spent 12 years in college admission and is the founder of College Money Tips. She also writes financial content and loves helping families navigate the college search process.
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