Money Girl Podcast listener named Tom C. says, “With all this talk of war with North Korea and similar things I’ve heard a lot about investing in gold. I’d be interested to hear your thoughts on investing in precious metals.”
If you do a Google search for the phrase “should I buy gold?” or ask different financial advisors that question, you’ll get a variety of answers. There are dissimilar schools of thought about whether owning gold or other precious metals is a good investment.
In this post, I’ll answer Tom’s question and recommend the best amounts and ways to buy gold if you decide to make it part of your investment portfolio.
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A Brief Overview of Gold
You probably know that gold has always been a powerful metal. Early civilizations around the world associated it with gods and immortality. It’s rarity, beauty, and durability mesmerized humans for thousands of years before we ever stamped it into coins and used it as a currency, which started around 700 B.C.
In the late 1800s, most major nations fixed the value of their currencies to gold, which is known as being on a gold standard. But in the 1900s most countries realized it wasn’t working. In the U.S., we took our currency off the gold standard in 1933, we adopted it again after World War II, and then abandoned it completely in 1971.
Most modern currencies are now fiat money, which means it isn’t backed by anything or linked to physical gold reserves. Even though there’s still a lot of gold held by central banks and governments in developed nations, it doesn’t match their supplies of money.
Should You Invest in Gold?
Over the long run, the price of gold has shown an inverse relationship to the U.S. dollar. When the value of the dollar goes up, the price of an ounce of gold goes down. And when the dollar decreases, gold goes up.
Gold tends to perform well when confidence in paper currency and the stock market goes down or there’s a fear of bad times ahead, such as a looming recession or war. For instance, during the 2008 recession, gold rose from about $1,000 per ounce to its all-time high, over $1,900, in September 2011.
Gold tends to perform well when confidence in paper currency and the stock market goes down or there’s a fear of bad times ahead, such as a looming recession or war.
Many argue that owning gold is like an insurance policy that allows you to hold value when the economy is struggling. However, be aware that its inverse relationship to the dollar doesn’t always hold true in the short term.
Even though people buy and sell gold every day, the buzz about investing in gold always gets louder when our economic situation could get rocky. Regardless of what’s going on politically, my answer to Tom’s question is that you should always own some amount of gold or other precious metals.
I’m a strong believer in having a diversified portfolio, and that includes some amount of gold. But the downside of owning gold or other precious metals is that they can be extremely volatile and risky. So, the trick is not to go overboard.
My recommendation is that you own gold in an amount up to 5% or 10% of your portfolio. For instance, if you have investments for retirement worth a total of $200,000, you might own a maximum of $20,000 in precious metals. The rest should be a diversified mix of stocks, bonds, cash, and perhaps real estate.
There are a variety of ways to invest in gold, but I’ll review two straightforward options that make sense for the average investor, each with pros and cons: bullion and gold funds.
How to Invest in Gold Bullion
Bullion is physical gold in the form of bars or coins, which is the purest way to own it. You can buy or sell gold online at sites like Silver Gold Bull or at local gold dealers. In the U.S., the 24 karat American Eagle gold coin is the most popular, but there are many different types to choose from.
The downside to bullion is that you must decide when and where to buy it, sell it, store it, and insure it. The current price of gold is called its spot price, which fluctuates constantly. When you buy gold, dealers charge you a premium above the spot price, such as an additional $40 per ounce.
Always shop to make sure you pay a competitive premium. And be wary of dealers who offer free storage or delayed delivery because they may not be legitimate.
The downside to bullion is that you must decide when and where to buy it, sell it, store it, and insure it.
Gold should be stored in a bank safety box or at home in a locked, fireproof safe. But a typical home or renter’s insurance policy offers very limited protection for bullion. So be sure to discuss it with your insurer so you understand the risk.
You may be able to beef up your existing policy with a rider or a gold addendum. Otherwise having your gold stolen or destroyed by a natural disaster means you could have a major loss.
The upside to bullion is that it may make you feel safe, like you could exchange it for necessities in an emergency. While no one really knows if gold could be used to buy food or shelter if the economy collapsed, you’d be in complete control of it.
How to Invest in Gold Funds
For most investors, owning bullion is too complicated and you should choose gold funds instead. Gold funds may be backed by bullion or they may own shares of companies that mine gold.
Funds allow you to skip all the hassles of buying bullion, and give most of the benefits of ownership. Some popular gold exchange-traded funds (ETFs) are the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU). They hold physical gold for you, so every share you buy represents a fractional interest in bullion assets.
The VanEck Vectors Gold Miners ETF (GDX) is a basket of mining stocks intended to track the overall performance of companies in the gold mining industry.
You can buy and sell most gold funds in a taxable brokerage account or in a retirement account, such as an IRA or SEP-IRA. Just like with a stock mutual fund or ETF, you can buy a set amount each month on autopilot.
You can buy and sell most gold funds in a taxable brokerage account or in a retirement account, such as an IRA or SEP-IRA.
I don’t recommend buying individual gold-mining stocks because they can be extremely volatile and risky. If you only own one stock, you’re not diversified and could see heavy losses.
Gold fund shares are traded on exchanges and are liquid, meaning you can buy and sell them quickly. The advantages of funds are convenience, diversification, and exposure to the entire gold market. Funds managers can’t guarantee that share prices will rise, but they’re experts who know a whole lot more about the gold markets than you or me.
The disadvantage is that you don’t have gold in your home safe, if that’s what you’re after to feel secure. Again, a modest allocation of no more than 10% of your portfolio is wise whether you choose bullion or gold funds.
Tips for Investors
Whether you’re investing in stocks of blue chip companies, real estate, or precious metals, remember why you invest in the first place: to build wealth slowly over time. If you think you can invest for the short term, you’re gambling, not investing.
What’s short term? You should never invest money you might need to spend within the next three to five years. That includes your emergency fund and potential house down payment, which should be in a high-yield bank account—not in gold, stocks, or any other investment.
Good investing is incredibly boring. You put small amounts into diversified investment vehicles that grow over the long term. Most of your investment dollars should be in stock mutual funds or ETFs with exposure to hundreds of companies in the U.S. and abroad.
A good rule of thumb that I recommend in my book Money Girl’s Smart Moves to Grow Rich is to subtract your age from 100 or 110 to determine the percentage you should invest in stocks. For example, if you’re 35, you could invest up to 65% or 75% in stock funds.
Why? Stocks have earned investors about 10% on average since 1928. The rest of your portfolio should be in completely different asset classes, including bonds, cash, real estate, and perhaps gold.
If you don’t want to own multiple funds, a way to simplify is to invest in one target-date fund, which has a complete, baked-in strategy and asset mix based on the date you want to retire. Remember that the end goal of investing is to build wealth slowly, by investing small amounts over a long period of time.
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