Experts have long considered gold — and many other precious metals — as a safe-haven bet. Especially in today’s world where economic uncertainties persist, adding gold to one’s portfolio seems to be the smart move many investors undertake. But the question remains: Should you buy or not buy? Regardless of your reason to invest in gold, this feature explores the pros and cons of adding it to your portfolio.
What are the top reasons for investing in gold?
Investing in just about anything comes with a risk. However, gold tends to hold its value well for a long time, making it a safe choice — much like most real estate assets, but with higher liquidity. Gold being a safe haven is a top reason to invest in it. But to help you decide whether you’ll include it in your portfolio, we’ll dig into its advantages and disadvantages in the next section.
Read: Amid economic instability, gold shines as a safe haven
Pros and cons of buying gold
Investors typically turn to gold to manage losses when the economy is in bad shape (e.g., high inflation). But will it benefit you and help you achieve your investment goals? Here, we weigh the pros and cons of buying gold.
Pro: It fares well during economic downturns
Gold is a dependable asset. Demand for it usually increases in times of economic downswings. And historical data is there as evidence.
According to GoldSilver, gold prices increased during six out of the eight most prominent stock market crashes in the last four decades. In particular, when the S&P 500 index fell about 56.8 percent during the late 2000s recession, gold proved to be a strong performer. Prices surged by 25.5 percent. It’s no wonder why gold is considered both a hedge and a safe haven for many major global markets, based on a 30-year analysis.
Pro: It’s universally recognized, scarce and lasts a long time
As per World Gold Council (WGC) estimates, about 209,000 tons of gold, valued at $12 trillion, have been mined throughout history. With the asset being “virtually indestructible,” the WGC notes that “almost all of it is still available in one form or another.”
Indeed, gold has been valuable since thousands of years ago — and it still remains true in today’s age. On top of it, it is a universally recognized asset. And unlike fiat currency, it won’t be devalued by overprinting. It’s also scarce yet in demand. Its worth gets only higher when economic upheavals affect investors’ behavior.
Pro: It is a highly liquid asset
Like other major assets, gold boasts high liquidity. It means that you can easily buy and sell it, especially with the emergence of many reputable platforms. You can purchase gold whether as tangible metals or as exchange-traded funds (ETFs) and futures, giving you better options to strategize.
Moreover, gold can be recycled indefinitely without losing its intrinsic value. This recyclability ensures that a significant portion of the metal remains available for trade, making it easier to buy or sell — even on the secondary market.
Con: It incurs substantial extra expenses
Buying physical gold is one of the most popular ways of investing in the yellow metal. However, keep in mind that it comes with additional expenses. You need to keep them in a safe place (for instance, a bank safe deposit box or a specialized storage facility) and have them insured to protect against damage or theft. And doing so leads to substantial expenses that you need to deduct from your gains. Apart from these, transaction fees that brokers and dealers charge further add to the overall cost of owning gold.
To help lower costs, consider buying gold mining stocks and alternative gold-backed paper assets.
Con: It doesn’t give you passive income or steady returns
Unlike some investments that yield passive income (e.g., rental properties, some stocks and bonds), physical gold doesn’t provide passive income, dividends or interest. You will only earn once you sell your gold. Hence, this type of asset may exhibit a potential performance lag on your portfolio over time.
You must be particularly aware of this if you’re the kind of investor who relies on steady income streams for necessities or retirement planning.
Tips for investing in gold
Setting your sights on the yellow metal? Here are tips to consider.
- Invest wisely by choosing assets you thoroughly understand. There is a diverse range of gold investment options. Jewelry constitutes almost 50 percent of above-ground stocks, while the physical financial gold market, including bars, coins, gold ETFs, and central bank reserves, represents almost 40 percent, totaling nearly $5 trillion. Before investing in any of these, ensure that you have beyond surface-level understanding of how to buy and sell them.
- Diversify and don’t overinvest. One of the golden rules in investing is to not put all your eggs in one basket. According to experts, you must allocate only 2 to 10 percent of your overall investments to gold. Overinvesting in gold can hinder potential long-term gains from other asset classes, such as stocks or bonds.
- Set clear investment goals. Many investors see gold as one of the most stable assets in the long run. However, you must remain cautious and invest with rationality to avoid emotional decision-making. Identify a specific goal in your gold investment efforts, craft a plan, and stick to it to prevent impulsive buying or selling.
- Always watch out for interest rates. Real interest rates, or interest rates adjusted for inflation, are a vital yet often overlooked factor affecting gold price movements. Specifically, it affects the opportunity cost of holding this asset, with low figures making gold more attractive to investors. Note that in times of rising inflation, the real return on traditional interest-bearing assets may plunge. Investors resort to non-interest-bearing assets like gold, which can better preserve wealth in the face of eroding purchasing power due to inflation.
Final thoughts
Notwithstanding your reason to invest in gold, thorough due diligence and strategic planning are crucial. Investors like you must be aware of the fluctuating performance of gold, especially over time. As such, you need always review and rebalance your portfolios to align with your investment goals.
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