Is Investing in Gold Good for Your Portfolio?
Last Updated: August 18, 2017
No investment has shined as brightly as gold over the last fifteen years. If you had invested $10,000 in gold bullion back in January of 2001, your 37 ounces would be worth almost $45,000, as of the day of this writing. But, when the economy is good, gold prices tend to drop, as evident during the economic boom of the 80's and 90's. But as soon as the world market began to take nose dive, gold prices started to soar and experts believe the price of gold will continue to climb in the coming years.
Unlike other investments, you cannot expect gold to earn you monetary dividends. However, many think of buying gold as an insurance policy, of sorts, providing a safe place to store your wealth and hedge against inflation, as it is a commodity that is almost certain to continue to be in high demand in the future.
What Determines the Value of Gold
Gold is a volatile commodity and its value tends to go through long stretches of highs and lows; years at a time, in fact. In addition to the impact of supply and demand, the value of gold is also impacted by the cost of production. And, in recent years, mining costs have been on the rise, thus raising the price of gold. Some of this evidently has to do with new environmental regulations requiring safer, and presumably more expensive, mining practices.
Besides the obvious factors of supply and demand and mining costs, the economy also affects the price of gold. The value of gold tends to move in the opposite direction of stock prices. When the stock market was at its all time high in the 80's and 90's, gold was $300 to $500 an ounce. Now, an ounce of gold costs about $1,274 an ounce (as of the date of this writing).
Will Your Money Will Be Safe if the Dollar Loses Value?
One of the greatest arguments for gold investments these days comes from the camp of people who believe it is the only way to protect your wealth if world currencies lose their value. What this implies is the assumption that the world would subsequently start trading in gold instead of currency. However, most governments with large supplies of gold don't necessarily have much power. On the flip side, the most powerful governments aren't necessarily gold-rich nations.
What Percentage of an Investment Portfolio Should Be in Gold?
Gold is a good portfolio diversifier because its price tends to move in the opposite direction of stock prices, and often against bond prices, too. Gold does not produce income and it really offers more of a psychological value to investors. Having gold in your portfolio gives one a downside protection if the stock market crashes.
You should limit investments in any one sector to 20 percent. If you are an aggressive investor, you may opt for the full 20 percent in gold. On the conservative side, though, shoot for no more than 5 to 10 percent.
How to Buy Gold
The best choice to buy gold varies from person to person and depends on the amount of money you have to invest, your investment objectives, the amount of risk you can absorb, and the length of time you intend to hold on to your gold. Having said that, here are the four ways to invest in gold:
- Buying Gold Bullion. Though it can certainly be satisfying to be in possession of gold bars 7 inches long, weighing over 27 pounds a piece, storage can be an issue. For someone just getting into gold, buying gold coins or gold jewelry is a great way to start and it is much easier to store than a load of gold bars.
- Buying Gold Futures. Those willing to absorb a bit more risk may decide to invest with gold futures. However, it is important to note that it isn't so much "investing" and it is "speculating." As explained by Bankrate.com, "A futures contract is an agreement to buy or sell a set amount of a specific commodity at a stated price on a specified future date. Futures contracts can be bought and sold on exchanges."
- Buying Gold Stocks. Purchase your gold shares in a publicly traded company that is involved in gold mining and related enterprises. This appears to be the least attractive of your options, as the price of their stock is subject to fluctuations in that specific company's business practices and production costs. As explained by Canadian entrepreneur and author Kevin O'Leary, "There is no reason to own the miners. If your cost to actually mine an actual ounce keeps going up, why would I ever buy the stock?"
- Buying Gold Exchange-Traded Funds (ETF's). According to Bankrate.com, this is "the easiest way to buy into gold fever." However, it is one to enter into with caution, "as investors around the world use gold ETFs to hedge their investments or speculate on gold prices, and the ETFs themselves can be more volatile than might be expected."
Bottom line, gold is by no means a must-have, but its representation of 5 percent of your portfolio seems a safe bet (i.e., it can't hurt).