A guide to investing in gold

With market uncertainty and the threat of a recession hanging over our heads, some investors may be wondering if now is the time to add gold to their portfolios. After all, gold has earned a reputation as a hedge against inflation and a safe haven in a turbulent economic environment.

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Here’s a look at whether gold really lives up to the hype, what questions you should ask before adding the metal to your portfolio, and the options you have if 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 considered the gold standard. But does it really deserve that reputation?

Experts have mixed opinions. Although gold “is a great hedge against ‘black swans’ — unexpected and catastrophic financial events,” it doesn’t do so well during good times when it “simply can’t compete and its price tends to weaken,” Kiplinger says. Nerdwallet supports this claim, noting that “over the past 30 years, the Dow Jones Industrial Average — a proxy for the overall stock market — has significantly outperformed gold.”

However, while the metal may not produce much in terms of income, it can offer diversification because “its price tends to move in the opposite direction of stock prices — and often against bond prices,” Kiplinger write. It can also provide what Tony Roth, head of wealth management strategies at UBS, describes as “psychological value”. Indeed, “nervous investors may want to hold 5 percent to 20 percent of their portfolios in gold for ‘downside protection,'” Kiplinger summarizes according to Roth.

What are the different ways you can invest in gold?

  • Gold stocks: One way investors can buy gold is by buying shares in a gold mining company. This allows you to choose which companies to invest in. And even though you won’t physically own any gold, you’ll be able to sell shares at any time. However, mining stocks “are affected by many factors other than the price of the metal, including stock market conditions and company management,” which “can make individual stock prices significantly more volatile than the metal itself — and the metal is quite unstable in itself,” Kiplinger notes.
  • Gold Funds: Another option is to invest in exchange-traded funds (ETFs) or mutual funds. Funds provide “more liquidity than owning physical gold and offer a level of diversification that a stock does not,” Nerdwallet write. Still, investors will want to watch out for management fees that some funds charge.
  • Gold Futures: In gold futures, investors enter into a legal contract to buy or sell a specified amount of gold at a point in the future. In this way, investors can potentially profit from changes in the price of gold. The advantages are greater liquidity than physical gold and no management fees like those that funds can charge (although trading fees may apply). However, “futures trading involves a lot of risk and is not a suitable investment option for an inexperienced investor,” Nerdwallet warnings. Also, there is the potential to lose money beyond the amount you have invested.
  • Physical Gold: And yes, it’s also possible to buy 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 various methods of doing so have their pros and cons. To determine if gold is something you want to add to your portfolio, here are a few questions to ask yourself:

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  • Are you hoping to minimize risk and overcome economic uncertainty? If you are concerned about risk during times of economic uncertainty, gold may make sense as an investment. Indeed, while the value of stocks “can fluctuate wildly from day to day, the value of gold remains largely stable, making it a great way to preserve value in your portfolio,” explains CBS News. Furthermore, “[i]In six of the last eight biggest stock market crashes of the last 40 years, gold prices rose.”
  • Are you worried about inflation? Gold is often considered a solid hedge against inflation and it is true that generally speaking “the price of gold does not track inflation”, Kiplinger says. But it is also “true that during periods of extremely high inflation, the price of gold can soar.” A better bet for a “guaranteed inflation hedge” is inflation-protected securities.
  • Are you looking for higher returns? If you are looking for high returns, gold is probably not the investment to turn to. Kiplinger says that “despite some remarkable gains in the 1970s and the first decade of the 21st century, gold has generated disappointing long-term returns relative to stocks.” And while stocks may be more risky, “as part of a balanced portfolio, they can help grow your balance sheet over the long term,” CBS News adds.

Do you want to receive dividends?

Unlike stocks, which can allow you to earn regular dividends, you probably won’t get any money from gold until you go to sell it. An exception here might be dividend-earning gold stocks or ETFs, but “[i]If you want an investment that provides an income stream, stocks are probably the better choice,” says CBS News.

Becca Stanek has worked as a personal finance editor and writer since 2017. Previously, she was the managing editor for investing and savings content at LendingTree, an editor at SmartAsset, and a staff writer for The Week. This article is based in part on information first published on The Week’s sister site, Kiplinger.com.

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