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Is Gold a Good Investment? 5 Solid Reasons to Invest in Gold

Catherine Tramell
Catherine Tramell

Published March 22, 2022

Last updated April 28, 2022

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Warren Buffett is not a fan of gold or, to be specific, “investing in gold”. He preaches against it whenever he gets the opportunity. Although one of the world’s richest men and famous investors is absolutely upfront about gold not being his cup of coffee, that hasn’t caused any real dent in gold’s popularity.

If Mr. Buffett had said something similar about a company’s stock, that stock would have plummeted in value almost instantaneously. That’s how fickle and sensitive the trading market is. The fact that gold has managed to survive external aspersions and is still coveted among its buyers speaks volumes about its resilience and integrity.

In this article, we’ll discuss in great detail a couple of things:

  • The benefits of investing in gold
  • A few limitations of gold (so that you have both sides of the coin presented)

The goal here is not to convert anyone into a gold buyer. Even if you’re not looking to invest in gold, you might wonder why so many people buy gold (as gold coins, gold bullion, gold bars, etc.) despite some finance gurus advising against it.

Is Gold a Good Investment?

Gold is a good investment and has been so for decades if you have a proper investment strategy in place. A gold investment offers stability to any portfolio, especially when the going gets tough. And since gold has steadily increased in price over the years, it also raises an investment portfolio’s value.

The following are ways in which gold investing lends to your finances:

Preserves Wealth

To buy and hold gold is a practice that dates back to the ancient Egyptians, who started making religious artifacts and jewelry out of gold. And that was several centuries ago, or before 560 BC, when people started using gold as a currency.

Great Britain instituted the gold standard because gold was and is synonymous with wealth. And since gold denotes “wealth”, it continues to hold significance in modern society despite the gold standard not being around anymore.

Almost 20% of the world’s above-ground gold supply is held by various financial organizations (the IMF) and central banks. Moreover, different central banks add to their existing gold reserves each time concerns relating to the global economy arise.

Paper-denominated currencies do not have a history of preserving wealth like gold. Most importantly, gold’s value will never be zero or anywhere close to it due to its inherent value. The same argument is not valid with stocks, paper money, etc.

Inflation Hedge

Any investment or asset class that offers cover against a currency’s declining purchasing power is an “inflation hedge”. The asset providing the protection usually increases or maintains its value during the period. Gold is one such asset.

When returns on your investment are lower than the inflation rate, your investment is not protecting your wealth against inflation. Gold doesn’t offer returns as interest income or dividends, but it goes up in value when the dollar gets hit by inflation’s effects.

In other words, as inflation goes up and paper currency erodes in value, the cost of gold rises. As a result, the gold investor is duly compensated for the rising prices with more money for the gold they own.

Kindly note, gold is not an inflation hedge at all times or when the markets are typical or rallying. Therefore, do not stock up on gold, hoping you’ll always be protected against inflation.

Safe Haven During a Geopolitical Crisis

Gold offers refuge during an economic crisis and when the world or countries are at war with each other. Tensions in Africa, the Middle East, or any other place on the planet drive gold’s price as investors usually view the yellow metal as their safety net during tense political environments.

Why is gold considered a haven during political uncertainties? Because when ancient empires collapsed and militaries carried out political coups, currencies collapsed. During such periods, people who had gold to their names could safeguard their wealth pretty well. 

At times, the gold they held helped them walk out of the turmoil relatively unscathed. Such past indications are reasons investors flock to gold whenever news events hint at some global economic or political uncertainty.

Not to mention, gold prices rallied positively during the Covid 19 pandemic. This chart shows how the gold price went up during the beginning of 2020 and kind of became steady while the world was still grappling with the problematic situation.

Portfolio Diversification

Gold lends diversity to any investment portfolio. If you’ve put all your money in stocks and the stock exchange is down, gold investments shall help steady your otherwise sinking ship of assets.

Similar is the case if your portfolio is replete with bonds, mutual funds, ETFs, etc. These paper-based investments are poorly hit when the economy is in shambles because they are linked to something else and have no inherent value. Gold, on the other hand, is a standalone asset, and its current or past performance is not linked to other investments.

The above passage doesn’t imply you mustn’t invest in stocks and bonds. The only advice is not to unsee gold as a potent investment vehicle since it offers to cushion your other investment tools when the path is riddled with potholes and stones.

Gold Appreciates with Time

Gold is not immune to depreciation. It, too, takes a price hit now and again. But the negative impact is usually not as drastic as you may experience with your stock or real estate investments.

That’s because gold is a finite source, and with time passing by, the rarity quotient of the metal only goes up. And because traditional gold buyers never believe they’ve got enough gold to help them tackle the next crisis, the market demand goes up alongside.

The spot price of gold in 2010 was around $1,200 an ounce. In November 2021, gold traded for $1,841 an ounce. In August 2020, gold rates were more than $1,950 per ounce. Even more significant is gold’s rise from around $270 in 2002 to hitting the $1725 mark at the beginning of 2012.

The particular period saw the infamous sub-prime mortgage crisis, which propelled the value of gold significantly. The stock markets, such as the S&P 500, fared poorly during the same period.

Gold Has Its Limitations

It would be misleading and disingenuous to talk about gold’s merits but not highlight some of its pitfalls. Before you start to buy gold for investment or allocate more funds to invest in gold, here are some of the not-so-favorable sides of investing in gold you must know.

It Isn’t Your Portfolio’s Growth Vehicle

As alluded to above, gold is not an ideal investment if you’d like to significantly boost your investment’s value over time — particularly not for a more extended period or a decade.

And when compared to other financial investment tools, such as stocks, gold fares poorly in terms of overall appreciation. Gold’s value has certainly gone up in price over the last decade, but it is no match to how stocks and bonds, mutual funds, ETFs, and other financial assets have performed during the same period.

Back in 2010, a Tesla share was $17. In 2021, its shares traded for approximately $700 a pop. Similar is the tale with shares of most other companies that started humble but are thriving now.

To see your stocks increase multiple times in value, you need not have invested in those blue-chip companies. A person who bought stocks worth $1,000 in 2010 is likely to be richer than someone who bought gold in the same year for the same amount.

Historically, equity benchmark indices have consistently outperformed gold over a more extended period, 10 to 20 years. Gold mainly performs during a financial crisis. When things are normal, gold prices pretty much move at a snail’s pace if they do.

The ability to provide significant returns on investment is why stocks constitute a considerable portion of most financial experts’ portfolios, despite all the risks and volatility attached to the stock market. Gold usually takes up around 5 to 10% of a knowledgeable gold investors’ portfolio because they know putting any more money in the metal could cripple their fund’s growth potential.

Physical Gold Pays No Dividends

If the growth of your investment is your sole requirement, gold is an excellent asset to invest in. But if you seek interest income or dividends, look elsewhere. But, to gold’s defense, it is kind of unfair to expect gold to pay dividends since it’s pretty much a form of currency.

If you’d like to invest in gold and also make dividend money, invest in stocks of gold mining companies, equity-based gold ETFs, gold mutual funds, etc.

Generally, an increase in gold prices often reflects in gold miners’ stock prices. Even a minor spike in the price of gold could result in gold stocks of properly run mining companies experiencing a boost. Moreover, gold mining stocks of well-managed firms stay profitable even when the price of gold is down.

In short, the return on investment is relatively high with paper gold investments compared to physical gold ownership. If you believe in owning gold in the metal, you must forego the above benefits.

Choose Gold Stocks Wisely

Kindly note, not all gold mining companies pay dividends. And the ones that do may not pay a decent chunk or won’t do it at regular intervals. Therefore, if you developed an interest in gold stocks primarily for the dividend aspect, evaluate the particular company or gold stock’s dividend performance over a period.

If a business has consistently strong cash flows and low debt levels, it will maintain healthy dividend payouts. Companies go through expansion and growth phases when they take on more debt, showing a lower cash balance. Therefore, assessing long-term numbers instead of short-term finances is imperative when examining a company’s balance sheets and other financial statements.

Timing is Key

Although not a “negative” per se, the time when you invest in gold could determine how profitable or unprofitable your investing turns out to be.

Long story short, gold is not a “good investment” when the gold market is upbeat or when the prices are high. The ideal time for investing in any asset (and not just gold) is when there’s not much hype around it or negative market sentiment. For gold, that non-ideal period is when the economy is doing good.

Gold had a dream run when the stock markets crashed during the Great Recession (2007 to 2009). If you had invested in gold before the crisis (2002 and 2006), you would have more than doubled or tripled your gold investment.

But if you bought gold when the economic collapse had just begun, your investment wouldn’t have appreciated at the same pace as the ones who were early to the party. The situation would have been even worse had you bought gold during 2012, after which gold prices started sliding down continuously until stabilizing in 2016 and regaining some momentum after that.

Conclusion

Like every investment, investing in gold is both advantageous and disadvantageous. Luckily, gold gives you more control over your investment. If you allocate a portion of your portfolio to gold wisely and choose the suitable economic climate for the purchase, you should be pretty happy at the end of the day.

If you are not remarkably upbeat about owning the metal or taking possession of physical gold and would like to earn some money as dividends or interest, put your money in stocks and bonds.

On the other hand, if you want to own the metal but do not want to deal with the metal’s storage requirements yourself and don’t fancy dividend payments, a gold IRA offers the right balance. We discussed gold IRA and gold IRA companies in great detail before. Click on the link to know more.