With market uncertainty and the threat of a recession hanging over our heads, some investors might be wondering if now is the time to add gold to their portfolios. After all, gold has garnered a reputation as a hedge against inflation and a safe haven in a tumultuous economic environment.
Here’s a look at whether gold actually lives up to the hype, what questions you should ask before adding the metal to your portfolio, and the options you have should you decide buying gold is right for you.
Is gold a good investment?
Especially in times of market turmoil and rising inflation, gold is often held up as, well, the gold standard. But does it actually deserve that reputation?
Experts have mixed opinions. While gold “is a great hedge against ‘black swans’ — unexpected and catastrophic financial events,” it doesn’t hold up as well during the good times, when it “simply can’t compete and its price tends to languish,” Kiplinger says. Nerdwallet backs up this assertion, noting that, in “the past 30 years, the Dow Jones Industrial Average — a good representation of the overall stock market — has significantly outperformed gold.”
However, while the metal might not produce much in terms of income, it can offer diversification, as “its price tends to move in the opposite direction of stock prices — and often against bond prices, too,” Kiplinger writes. Further, it can provide what Tony Roth, head of wealth management strategies at UBS, describes as “psychological value.” Indeed, “nervous investors might want to hold anywhere from 5 percent to 20 percent of their portfolios in gold for ‘downside protection,'” Kiplinger summarizes, per Roth.
What are the different ways you can invest in gold?
- Gold stocks: One way investors can purchase gold is by buying stock in a gold-mining company. This allows you to select which companies you invest in. And while you won’t physically own gold, you’ll be able to sell a stock at any time. However, mining stocks “are affected by many factors other than the metal’s price, including stock market conditions and the company’s management,” which “can make individual stock prices considerably more volatile than the metal itself — and the metal is plenty volatile on its own,” Kiplinger notes.
- Gold funds: Another option is investing in gold exchange-traded funds (ETFs) or mutual funds. Funds provide “more liquidity than owning physical gold and offer a level of diversification that a single stock does not,” Nerdwallet writes. Still, investors will want to watch out for the management fees that some funds charge.
- Gold futures: With gold futures, investors enter into a legal contract to either buy or sell a specified amount of gold at some point in the future. In this way, investors can potentially profit from changes in the price of gold. The upsides are greater liquidity than physical gold and no management fees like the ones funds might charge (though trade fees may apply). However, “trading futures contracts involves a lot of risk and isn’t a suitable investment option for an inexperienced investor,” Nerdwallet cautions. Further, there is the potential to lose money beyond the amount you invested.
- Physical gold: And yes, it is also possible to purchase actual, physical gold — think gold bars, gold coins, or even gold jewelry. But with this method of investing come the associated challenges of storage and insurance, not to mention buying and selling.
Does gold make sense for your portfolio?
As you can see, investing in gold and the different methods of doing so each have their pros and cons. To help determine if gold is something you’d like to add to your portfolio, here are some questions to ask yourself:
Are you wanting to receive dividends?
Unlike stocks, which can allow you to earn regular dividends, you likely won’t get any money out of gold until you go to sell it. An exception here might be dividend-earning gold stocks or ETFs, but “[i]f you want an investment that provides an income stream, stocks are likely the better choice,” says CBS News.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset, and a staff writer for The Week. This article is in part based on information first published on The Week’s sister site, Kiplinger.com.
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