Table of Contents
- 1 Is Investing in Gold Worth it?
- 2 So Why Consider Investing in Gold?
- 3 What You Need To Know If Considering Investing in Gold.
- 4 What Are The Pros And Cons of Gold Investing?
- 5 What Are The Options For Investing In Gold?
- 6 Gold Investment Conclusion
Is Investing in Gold Worth it?
I don’t want to give you the impression that investing in gold is the holy grail of financial improvement or even retirement planning, after all, I am no longer a financial advisor able to give investment advice. Just like stocks and shares, the price of gold goes down as well as up. You can see that for yourself on the Dow Jones Industrial Average chart above that although the stock market has given a good return over a ten-year period, there were also periods of a downward trend. But what I do want to do is give you the facts as I have found them, with links to the information, so you can make up your own mind as to whether investing in gold, is a worthwhile investment or not.
It is well documented for the fact that it is true, that over the past 20 years gold has outperformed stocks as the image below from Macrotrends shows.
Having said that, if you look at the gold price and the overall performance of gold against the stock market price over the last five years, the stock market is slightly ahead
Historically stocks have outperformed gold and other physical precious metals investments, and so the purpose of this article is not to try and convince anyone that investment in the gold industry, whether it is investing in a gold mining company, gold bars, gold funds etc. is better than investing in stocks, but that gold investment is worth considering as worthwhile for investment objectives such as diversification of your investment portfolios.
So Why Consider Investing in Gold?
When you look at the history of gold, this metal has always been a big deal. I say it’s a big deal not only due to its worth but also because investing in gold has somehow always proved to be the best way to avoid inflation.
Individual retirement accounts have been brought down by inflation, especially for investors whose main focus was traditionally on the stock market, real estate, and private equity. But buying a precious metal like pure gold for the diversification of your portfolio, to increase your financial status and wealth, or to improve your IRA account, will always prove to be worthwhile. Here’s why.
What You Need To Know If Considering Investing in Gold.
There are a number of various reasons why you should consider investing in gold, especially as an IRA investment, none more than the diversification of your investment/retirement portfolio.
In 1997, Congress passed the Taxpayer Relief Act which allowed investors to put away gold and other metals into a self-directed IRA. They were responding to investors who wanted to diversify their retirement portfolio from paper assets like cash, stocks, and bonds to add some tangible assets.
Edmund Moy, who is the leading Strategist for The Fortress Gold Group and was also the Director of the US Mint between 2006-2011, stated the following in an article he wrote in September 2014: (click here for original source)
“By 2013, the total amount of assets held in all the Individual Retirement Account’s set up in the USA totaled 6.5 trillion dollars, and out of that amount 2.5 – 4 percent were now in non-traditional forms, such as gold.“
He went on to state:
“And looking long-term, there are several risks that favor the continued growth in gold IRAs, such as the fragile global economic recovery, potential of aggressive inflation in the United States, growing concern of a major stock market correction, and increased geopolitical risks.”
When it comes to building a diversified investment portfolio, investing in alternatives such as purchasing gold, from the normal investments, needs to be considered. The main reason being that diversification helps balance out the variances in values of other types of investment commodities. Sometimes an investor may be heavily invested in a particular type of investment such as stocks or ETF’s, but with a diversified portfolio, they may well have stocks from various sectors from the retail sector to the tech sector and so on.
When one of these sectors, such as the oil sector, is going through a bad patch, as it is at the time of writing this, the chances are good that sectors such as retail or tech stock may be doing quite well. This not only balances out losses from the oil sector, but it can actually help to increase the value of a portfolio significantly over time.
Investors Want More Diversification
True effective diversification is not just diversifying stocks and ETFs; it is much more than that. More and more investors are looking to broaden their horizons by investing in things like REIT’s, corporate bonds, buying gold coins and bars, and silver, as well as stocks and ETFs.
BullionVault, who is a leading peer-to-peer gold-and-silver-bullion exchange, based in London, recently produced its annual report and analysis on how varying assets have performed over the last 50 years (1972-2021) in both the UK and the USA. (see report here)
As you can see from the facts below, although not the number one performing asset, gold has beaten other key assets in its returns over the past 50 years and has this century outperformed corporate bonds by a considerable margin.
ASSET PERFORMANCE LAST 50 YEARS
- Gold topped the table of US asset performance 10 times since 1972, beating US equities (9 times), matching non-US developed world stock markets, and coming behind only Real Estate (REITS, 12x);
- Gold also came bottom 11 times, worse than any other major asset class, followed by commodities (9 times) and non-US stocks (7x);
- Gold’s 50-year return (+4,084% gross of costs since the end of 1971) has beaten the cost of living (582%) and all assets except US equities (18,529%), REITs (11,457%) and non-US stocks (6,561%);
- Since 1972, gold rose in all 5 years when US stocks lost 10% or more, averaging 34% gains. So did US Treasury bonds, averaging 9% total returns;
- The 21st Century so far has seen REITs lead (+1,024%) followed by gold (525%), US equities (391%), corporate bonds (254%) and then housing (175%).
What Are The Pros And Cons of Gold Investing?
The Pros Of Gold Investment
A Shelter Against Volatility
The answer to why an investor should purchase this kind of investment is multifaceted. The first reason to invest is that it can be used as a hedge of protection against market volatility and inflation. Market volatility can affect the value of gold, but it typically affects it much less than other types of investments. One of the reasons for this is that the value of stocks, bonds, and ETFs is based on paper money and not in gold.
Protection from Inflation-Deflation
Inflation has always been a concern because inflation weakens the value of paper money. However, gold does not labor under the same constraints as paper money. It has a value that is established mainly through demand. Paper money can be weakened when there are shifts in power from one country to the next, or when there is some sort of political upheaval. In some cases, paper money can be rendered completely worthless, should the affairs of a particular country get bad enough. It is in these situations, gold benefits the investor.
Gold has had a remarkable performance during times of inflation and also deflation. Inflation is basically a period when the economy of a nation is struggling and the cost of living is high. During these times, gold prices tend to increase and that’s why it is often regarded as a ‘hedge against inflation’. Deflation, on the other hand, is when the economy is also struggling and business activity is quite slow. During deflation, it has been seen to perform well too.
Another thing to consider is its value. As you can see from the price chart below, the value of gold did skyrocket some years back, at one point reaching over $2000 per ounce in mid-2020. Since then it did drop and fluctuated to where it is today at around $1900 per ounce (The current price of gold can be found on our gold price page, as well as the historical price ).
In a recent article on capital.com addressing the price of gold and the forecast for 2022 and beyond, Author Nicole Willing made the observation that:
Investors were also concerned about recent US data showing inflation to be at a 40-year high of 8.5%, which has led to a renewed flurry of interest in safe-haven assets such as precious metals.
She also went on to report…
Recently investment bank Goldman Sachs raised its 2022 gold target to $2,500 per t oz, citing a “perfect storm” of increased investor and central bank demand amid economic and geopolitical uncertainty, as well as resilient Asian retail demand.
Welling goes on to point out that analysts from Heraeus Precious Metals, one of the worlds leading providers of precious metals services and products, have stated:
“Just seeing news reports of a massive explosion in the capital city of Ukraine last night provides [a] flight to quality lift for gold and silver and most specially palladium. However, the potential for a gold mining strike in Africa could also provide support for gold today but that news will likely take a backseat,” analysts at US brokerage firm Zaner noted. “The situation in Ukraine continues to attract gold ETF investment with year-to-date gold holdings now up to 3.4%… The net spec and fund long in gold could now be the largest since July 2020. Going forward, even temporary calm will leave gold and silver extremely vulnerable to large declines.”
The Cons Of Gold Investment
While we at Gold Trends.Net do think that gold is a good investment, there are downsides to investing in it, just like there are downsides to investing in anything. Therefore you really must consider your reasons as to why you want to consider owning gold or any other precious metals before you start out.
It doesn’t produce cash.
What I mean by that is, that if you are looking to invest for the sole purpose of generating cash on a regular or short-term basis, gold is not the investment type you want. Precious metals don’t pay out a dividend, therefore if that is what you want, then you need to consider investing in stocks.
Don’t think of it as a short-term investment
OK, we all know that you make your money when what you have invested in increases in value. While gold has increased considerably in value over the past 20 years, over a limited time frame we see the value of gold bounce in both directions.
We are not saying you can’t make money short term, if that is what you want to do, you are going to have to be checking its price almost like a Hawk on a day-to-day basis. But if you take the view that investing in it is for the long-term and it is for diversification, then you can buy it and leave it alone without stressing as to whether it’s going to make you any money tomorrow.
What Are The Options For Investing In Gold?
There are various ways in which you can invest in gold and I outline the top nine options available to you to enable you to invest in gold.
1. Gold Coins
One option that allows you to invest in gold is to purchase gold coins. These coins are struck by governments and private mints and come in a variety of weights and purity levels. Popular gold bullion coins include the American Gold Eagle, Canadian Gold Maple Leaf, and South African Gold Krugerrand.
2. Gold Bars
Another option that allows you to buy gold is to buy gold bars. A gold bar will come in a variety of sizes, from 1 gram up to 400 ounces. They are also available in a variety of purity levels, from 24 karat to 99.99% pure.
3. Gold Mining Stocks
Another option for gold investment is to purchase shares of gold mining companies. This gives you exposure to the price of gold but also to the company’s performance. Be aware, however, that investing in the gold mining sector in gold mining stocks produces greater price volatility than bullion and can be affected by factors such as operating costs and political stability.
4.Gold Futures Contracts
For investors looking to take a more active approach, gold futures contracts may be the way to go. These contracts allow you to buy or sell gold at a set price in the future. Be aware, however, that futures contracts come with a high degree of risk and should only be purchased by experienced investors.
5. Gold Mutual Funds
Another option for gold investing is to purchase shares of gold mutual funds. These funds invest in a variety of gold-related assets, including bullion, mining stocks, and futures contracts. They can provide diversification for your portfolio and can be purchased through a broker.
6. Gold ETFs (Exchange Traded Funds)
For investors looking for a more hands-off approach, gold ETFs may be the way to go. These funds invest in gold bullion and other gold-related assets and can be purchased through a broker.
7. Gold Mining Companies
Another option that allows you to invest in gold is to purchase shares of gold mining companies. This gives you exposure to the price of gold but also to the company’s performance. Be aware, however, that just like investing in mining stocks which are more volatile than bullion and can be affected by factors such as operating costs and political stability, as I have pointed out, investing directly in mining companies brings its volatility also, when you consider you will be dealing directly with gold miners and personnel issues.
8. Gold-Backed Cryptocurrencies
For investors looking for a more speculative investment, gold-backed cryptocurrencies may be the way to go. These digital tokens are backed by physical gold and fluctuate with rising gold prices as well as gold stocks and can be purchased through a cryptocurrency exchange. Be aware, however, that these assets are highly volatile and come with a high degree of risk as they of course decrease in value rapidly as well, so bear that in mind when making your investment decision.
9. Gold IRA Rollover
When considering an investment in gold, one area that is currently getting a lot of attention is investing in a gold IRA rollover. There are numerous other ways to invest in gold, but also what is being seen is that as more and more people look to hold their assets in IRA’s ($ 6.5 trillion in 2013), up to 4 percent is in non-traditional forms, such as gold.
There are a number of factors that need to be taken into consideration when taking out a gold IRA rollover. For one, the best way is to use it for diversification and not put all your retirement eggs in one basket.
You want to ensure you use the best custodian you can get to set up your gold IRA for you, and that is why I have carried out extensive reviews of the best gold ira companies, for you so you can gain all the relevant information to help you when it comes to investing in a gold IRA.
The beauty of a gold ira rollover is that you don’t need to take out another IRA, you can choose to rollover some or all of your current IRA into a gold IRA. Also, it doesn’t matter if your IRA is traditional or Roth or if you have a 401(k), the ability to roll part or all of it is available to you. Whichever rollover specialist you talk to, they can advise you accordingly in relation to the best way to roll your existing plan into a gold-funded plan.
What About Investing In Jewelry?
While gold jewelry can be a beautiful addition to your wardrobe, it’s important to remember that it is not an investment. Gold prices fluctuate based on a variety of factors and can go down as well as up. In addition, gold jewelry often comes with a high mark-up, making it a poor choice for investors looking to get the most bang for their buck.
Gold Investment Conclusion
I have only really given an overview when it comes to gold as part of your investment strategies whether you look to do so through gold stocks, mutual funds, or buying gold through individual gold companies to add it to your retirement account. Whether you are looking at owning physical gold or working through the gold market with a gold ETF, whatever your choice, it is worth seriously considering how gold has performed against other asset classes. While you must always consider the past performance of gold as you would say a mutual fund, the way the price of gold has performed over the past ten years, shows gold is one of the few investments worth serious consideration as an investment decision. And like all investment decisions, make them after you have spoken to advisory or brokerage services or your current financial advisor.