Pro’s and Con’s of Gold Investing: A Comprehensive Guide

By Tim Schmidt - UPDATED: October 4, 2024

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Let’s talk gold. It’s been a symbol of wealth and power for centuries, shining bright in the hearts of investors. But is it really the golden opportunity it’s often made out to be?

As with any investment, there are two sides to the coin (or in this case, the gold bar). Buying gold can be a safe haven in times of economic uncertainty, offering a way to diversify assets and protect wealth. However, it’s not without its drawbacks, and it’s essential to understand the pros and cons of various forms of gold investments, such as bullion, coins, and ETFs, before diving in.

What is Gold Investing?

Definition of Gold Investing

Gold investing refers to the act of allocating a portion of one’s financial portfolio to gold, either in physical form or through financial instruments such as gold mining stocks, exchange-traded funds (ETFs), or mutual funds. This investment strategy is often employed to hedge against inflation, economic uncertainty, and market volatility. By investing in gold, individuals can diversify their portfolios, potentially reducing risk and enhancing long-term stability.

Brief History of Gold as an Investment Option

Gold has been a cornerstone of wealth and trade for millennia. Ancient civilizations, from the Egyptians to the Romans, used gold as currency and a store of value. Fast forward to modern times, and gold investing has evolved significantly. The gold standard, which pegged the value of currencies to gold, was a dominant monetary system until the mid-20th century. Today, gold investments come in various forms, including gold coins, gold bars, and gold ETFs. These options provide investors with multiple avenues to incorporate this precious metal into their portfolios, ensuring that gold remains a relevant and valuable asset in contemporary finance.

Top Reasons to Invest in Gold

Let's dive into the reasons that are often viewed as attractive when considering gold investment.

1. Value Preservation: Gold commonly retains its value, even in times of economic instability. That's apparent from the 2008 financial crisis when gold prices increased while stock markets crashed. So, it's seen as a way to protect wealth.

2. Inflation Hedge: Gold often performs well during high inflation periods. The 1970s serve as an example, seeing gold prices surge as inflation reached its peak.

3. Currency Hedge: When the U.S. dollar — or any major currency — weakens, gold often gains in value. This makes gold a potential hedge against currency fluctuations. Evidence of this was noted in the early 2000s when the dollar weakened and gold prices rose.

4. Supply Constraints: Gold mining isn't exactly a growth industry. According to the Gold Survey by Metals Focus, mine production fell by 2% in 2020. This constraint in supply can lead to increased prices if demand rises.

5. Diversification: As an asset, gold typically doesn't move in tandem with stocks and bonds. Adding gold to a portfolio could, therefore, offer a diversification benefit.

6. Crisis Commodity: As gold often performs well in times of geopolitical turmoil, investors tend to flock to the gold market during global tensions. The Gulf Wars, for instance, reinforced gold as a safe haven due to its price increase during these periods.

Again, while these reasons make gold appear as an enticing investment, it's crucial to keep in mind the previously discussed potential drawbacks.

Advantages and Disadvantages of Gold Investment

Gold investing offers both attractive advantages and notable disadvantages. In this section, we'll unpack both sides of this golden coin, which I hope, will better equip you in your investment decisions.

Pro: Gold Performs Well in Economic Downturns

An appealing quality of gold, it's a reliable asset when times get tough economically. Evidence speaks louder than words here. Referencing GoldSilver data, gold prices spiked in six out of eight noticeable stock market crashes over the past 40 years. A key example of gold's resilience? During the 2008 recession, when the S&P 500 took a massive 56.8% hit, gold prices took an uphill route, surging 25.5%. That's why, based on a 30-year analysis, gold's often tagged as both a hedge and safe haven across major global markets.

Pro: Universally Valued, Scarce, and Durable

Quoting World Gold Council (WGC) estimates, throughout history, $12 trillion worth of gold has been mined, approximately 209,000 tons. Given it's "virtually indestructible," according to WGC, almost all mined gold can be found in one form or another today. With roots in value dating back thousands of years, gold maintains its stature in today's world. A globally recognized asset and famous for its scarcity, gold is insulated against devaluation via overprinting, unlike fiat currency. Its worth spikes when economic shifts swing investor sentiment.

Pro: High Liquidity of Gold

Gold's not only a major asset, it's also easily tradeable, thanks to its high liquidity. With a plethora of reputable platforms, buying and selling gold, whether as physical metal, exchange-traded funds (ETFs) or futures, is easier than ever. Moreover, its indestructibility allows endless recycling without loss in intrinsic value, ensuring a sizeable chunk of the metal stays in circulation for trade. This makes it easy to buy or sell, even on the secondary market.

Con: High Additional Costs Associated with Gold

While buying physical gold remains a popular investment strategy, it’s not without its financial burdens. Safeguarding your gold in safe deposit boxes or secure storage facilities, and adequate insurance doesn’t come cheap. These extra costs can eat into your profits. Also, transaction fees from dealers and brokers can further raise the overall cost of gold ownership. Considering gold mining stocks and alternative gold-backed paper assets could be a potential cost minimizer. Additionally, gold stocks can be a cost-effective alternative to physical gold, offering potential for dividends and capital appreciation.

Con: No Passive Income or Reliable Yields

A drawback of physical gold investment is its absence of passive income or regular dividend yield, unlike properties, select stocks and bonds. Profits are made only upon selling your gold. Over time, this attribute might slow the performance of your portfolio. If you're an investor banking on consistent income streams for necessities or retirement planning, keep in mind, gold won't meet this criterion.

Gold as a Store of Value

Historical Stability of Gold Prices

Gold has long been celebrated for its stability as a store of value. Unlike other assets that can be highly volatile, gold prices have historically remained relatively consistent. This stability is particularly appealing during times of economic uncertainty, as gold prices often increase when other markets falter. For instance, during financial crises or periods of high inflation, gold tends to hold its value or even appreciate, providing a reliable safeguard for investors. This enduring stability makes gold a favored choice for those looking to preserve their wealth over the long term, reinforcing its reputation as a stable investment.

Strategies for Gold Investment

Given the advantages and disadvantages of gold investing discussed previously, it’s essential to approach gold investment strategically. Here, I’ll be providing some key investment strategies that could potentially guide you when dealing with gold.

Additionally, diversifying into precious metals like gold and other alternatives is crucial for a balanced investment portfolio.

Buy Physical Gold

One could opt for buying physical gold, which comes in forms like coins, jewelry, and bullion bars. Remember, however, buying physical gold is best when you intend on keeping it as a 'hedge' or insurance against economic uncertainty. Additionally, keep in mind the challenge of storing and insuring physical gold.

Gold Exchange-Traded Funds (ETFs)

Investors looking for a liquid way to invest in gold might find gold ETFs attractive. These funds operate like shares, traded on conventional exchanges. Remember that while this method eliminates the need for physical storage, it's indirectly tied to gold prices and susceptible to market volatility.

Invest in Gold Mining Companies' Stocks

Investing in gold stocks, particularly in gold mining companies, can offer exposure to gold prices with some added elements. Investors in this strategy need insights into a mining company’s operating efficiency, mining reserves, and exploration activity in addition to being abreast with gold market trends.

Gold Mutual Funds and Gold Index Funds

Another viable option includes investing in gold mutual funds and gold index funds. Here, rather than buying physical gold, you'd buy shares in multiple companies involved in gold, spreading risk across several entities. Remember that this method requires confidence in the managers of these funds.

When implementing these strategies, it's crucial to balance gold investments with other assets, ensuring a diversified portfolio. It's also crucial to consider the timing of the purchase. Like other investment options, it's generally better to buy gold when the price is low to sell when it's high. However, assessing exactly when gold is at its lowest or highest point isn't straightforward. So, consult with a financial advisor before making big decisions, and remember, every investment comes with its share of risks.

Lastly, it's worth noting I covered the question of is it better to have gold in your IRA or in physical storage? 

This is an important entry because for me, personally, I am holding gold for the long term and feel that having gold in an individual retirement account is a move that will pay off huge rewards when I reach retirement age.

Conclusion

So there you have it! Gold investing can be a shining opportunity for those looking to preserve wealth and hedge against inflation or currency woes. It's a durable, scarce asset with universal value and high liquidity. And let's not forget its role as a crisis commodity, offering a safe haven during geopolitical unrest. But it's not all glitter and gold. Investing in this precious metal comes with its own set of challenges, like high additional costs and the absence of passive income. And remember, it's crucial not to put all your eggs in one basket. Diversifying your portfolio, timing your purchases, and seeking professional advice can help manage the risks. So, is gold a good investment? Well, it'll ultimately depend on your financial goals and risk tolerance. Happy investing, folks!

Why is gold an attractive investment option?

Gold is appealing to investors for its ability to maintain value during economic instability, serve as an inflation and currency hedge, and its potential for increased prices due to supply constraints. It is also beneficial for portfolio diversification and performs well during geopolitical uncertainties.

What are some advantages of investing in gold?

Investing in gold offers several advantages, including its performance during economic downturns, its universally recognized value, scarcity, durability, and high liquidity.

What are the disadvantages of investing in gold?

Some of the disadvantages of investing in gold include high additional costs involved and the fact that gold does not generate passive income.

How can one invest in gold?

Investment in gold can be made through several mediums, including buying physical gold or investing in gold Exchange-Traded Funds (ETFs), gold mining company's stocks, gold mutual funds, or gold index funds.

Is it necessary to seek advice before investing in gold?

Yes, similar to any other significant investment, it is recommended to seek advice from financial experts before investing in gold due to the inherent risks involved. The importance lies in timing the purchases wisely and balancing gold investments with other assets.