Many people recommend investing in gold and other precious metals for a variety of reasons. Gold has been a valuable asset for generations, and many people still consider it an important component of investing.
The price of gold stays fairly stable but has minor fluctuations every day. The stability in the price of gold means it is not necessarily the best investment to make for long-term growth. However, since investing in gold doesn’t generally include much risk, it makes gold a great tool for balancing out riskier investments.
When you do research about how much gold you should have in your portfolio, you will find that the recommendations vary a lot. For example, some people will say that a majority of your portfolio should be dedicated to gold, while others say to minimize your gold investments.
In this article, we will discuss the variety of reasons that people invest in gold in the first place. This will help you decide whether gold investments will add value to your portfolio. We will then summarize the most common advice that we have found about investing in gold. In the end, we hope that you can come up with an amount of gold that works for you and your investment portfolio.
Why You Should Invest in Gold
While you may not often hear about investing in gold in popular culture and conversations about economics, many investment experts still recommend it. Investing in gold is a great way to diversify your investment portfolio with a precious metal that has held and will continue to hold its value for generations. Some examples of gold investments
The recommendations for gold caution against only investing in gold or for much of your investment portfolio to be centered around gold, but we will discuss this in detail later. Instead, the general consensus suggests that you invest a portion of your portfolio in gold.
Let’s review a few of the top reasons why experts say everyone should own some gold as part of their investment portfolio.
Protects Against Inflation
One of the biggest reasons people recommend investing in gold stems from the historical trends that indicate the price of gold rises during inflation. Some investing professionals have claimed that no statistically significant relationship between inflation rates and the price of gold exists, at least in the short term.
However, over longer periods—decades or even centuries—a slight trend shows that the price of gold rises when inflation is high. This upward movement is sometimes enough to convince many people to invest in gold in preparation for inflation or economic collapse.
Since no statistical significance appears in the relationship between gold and inflation, this shouldn’t be the only reason you invest in gold. Don’t expect the price of gold to increase as soon as inflation happens.
You Can Always Cash Out
The ability to quickly cash out investments in gold offers another reason that people like to invest in this precious metal. If the price of gold has decreased since your original purchase, you might not get all your money back. However, numerous bonds, CDs, and other investment tools have serious fines and penalties if you withdraw your investment too early.
With gold, you don’t have to worry about fines or penalties. You can simply take your investment to the nearest gold buyer and walk away with cash in hand. This option proves attractive to many people because of the security in knowing that you can always return your investment for cash at any time.
Scarcity provides another reason that people recommend investing in gold. Authorities estimate that a majority of the gold in the world has already been mined and currently circulates in the world’s market. Eventually, all the gold in the world will be in circulation, and it will become harder to purchase.
Some think that when this happens, the price of gold will increase due to scarcity. Because of this, many recommend investing in gold now since the price will be much higher in a few decades.
If you plan to invest in gold because of its scarcity and estimated rise in value once it is all mined, consider that mining gold is projected to be unsustainable by the year 2050. At that time, we might start to see the price of gold increase due to scarcity. Consider investing for this purpose as a long-term plan. You should not plan to remove your gold investment from your portfolio for about 30 years if you choose to invest based on gold’s potential future scarcity.
Intrinsic Value of Gold
Many people choose to invest in gold because of its intrinsic value. Manufacturers and certain industries use gold in a lot of electronics and other important machinery. Some people believe that the price of gold will skyrocket in a time of global turmoil and complete economic collapse because people will need it for these purposes.
However, not all economic experts believe this scenario to be true. This should not necessarily be a top reason you invest in gold since it is so unlikely to happen.
The biggest reason people recommend investing in gold stems from the idea that it adds diversity to your portfolio. However, gold is not necessarily the very best commodity to invest in, so it should not be at the forefront of your investment portfolio.
When it comes to how much of your portfolio should be dedicated to gold, the suggestions vary. However, most people agree to not make it a significant portion of your portfolio. They make this recommendation because gold has proved a poor investment over time compared with other common investment tools.
From the 1970s to today, the price of gold increased about 1.2% per year when you consider inflation. Over the same period, the S&P 500 grew by 8.1% per year when you factor in inflation. Looking at the numbers, it seems obvious that investing in the stock market is a much better idea than investing in gold.
Overall, gold remains a great commodity to invest in as it supplies stability and makes for a safe investment option. The S&P 500 could suddenly fall and end up losing money, affecting the value of many people’s investment portfolios. However, that risk is associated and even expected with the stock market. If you want an extremely low-risk investment portfolio, then gold makes a great investment.
Don’t Make Gold a Significant Investment in Your Portfolio
Because of gold’s poor performance compared to the stock market, most people recommend that you don’t invest a significant portion of your portfolio in gold. Recommendations for how much of your portfolio to invest in gold vary widely. However, most of the advice falls around the same numbers.
Limit gold investments to 5-10% of your portfolio. This generally agreed-upon amount helps mitigate riskier investments without relying on it too much.
As a general rule, this percentage was created after reading through many different recommendations. Before making your investment, we suggest that you perform some independent research to decide the right portfolio makeup for your needs and goals.
Some experts recommend investing in more gold, with recommendations of up to 65% of your portfolio being in gold. Many others suggest investing less of your portfolio in gold, with some saying not to invest in it at all. Ultimately, you will make the choice of how much risk you are willing to accept.
Owning Physical Precious Metals vs. ETFs
Today, you have multiple ways that you can invest in gold. Many people invest in physical gold coins or bars. This preferred method of investment works for many investors as it can always be liquidated and sold for cash. Others feel that storing gold in their homes gives them a safe way to invest, and the liquidity aspect offers a benefit that outweighs any risk.
Still, other people consider owning physical gold and storing it in your home comes with too much inherent risk. When stored this way, gold could get lost, stolen, or damaged during an emergency or disaster. For people who want to invest in gold but don’t want to hold the physical metal, they can invest in a gold exchange traded fund or ETF.
Gold ETFs are entities that own a lot of physical gold, then sell shares of that gold on the stock market. The ETF manages the physical metal and keeps it safe while the purchaser enjoys the benefits of the rising value of the metal. People who invest in gold with this method enjoy all the benefits of investing in the metal except for its quick liquidity. You can also invest in gold using an IRA account.
Many people that have been investing in gold for years oppose the idea of gold ETFs. However, these ETFs make investing in gold very easy and accessible to more people. As more people invest in gold, the demand for the commodity rises. Therefore, the price of gold increases, which is great for anyone who owns gold.