You have no doubt seen those “buy gold” advertisements in radio and television where someone tries to convince you that gold is your only savior because the markets are bad and they could crash at any moment. But, is that all true? Is investing in gold the right thing for you?
Gold is often compared to stocks, and not fixed incomes like bonds, but it’s not exactly the same either. It’s also made to seem like you should be all in or all out and place all your money in it. But putting all your eggs in one basket is always a risky affair, and this is no different.
Financial experts and your next-door neighbor, both of them have differing opinions on gold. If you were to listen to one of the most successful businessmen, Warren Buffett, you would think that gold has no place in a modern portfolio. Still, there are many other equally brilliant people who say that it should.
So, what is the way to go?
When Gold is NOT a Good Investment
Let’s get one thing out of the way: gold doesn’t have any intrinsic value, which means it doesn’t pay a dividend. It should also be mentioned that if you want to invest in gold, you shouldn’t be thinking of coins or jewelry; it should always be pure gold bullion.
One of the best indicators of whether it is a good idea to invest in anything is its history. According to Money magazine, the value of gold had increased by about 200% from 1986 to 2017. There was an especially strong showing from 2006 to around 2013-2014, with an incredible run-up in that time frame.
In comparison, the long-term history for that same time period shows that the Dow Jones has gone up by around 900%. That’s certainly a massive difference!
All of this isn’t to say you should invest in gold. However, it is best not to hold it as a physical investment if you do choose to do so. Buying gold bars and stocking them in a safe in your house isn’t very safe or practical. It would be better to invest in ETF or mutual funds that sell gold position if you wish to make gold bullion a part of your portfolio.
When Gold IS a Good Investment
Now let’s look at the situation in which gold would be a good investment. A 2014 article published in Casey Research (that is still relevant to today’s market) argued that gold should be a fixed asset in the portfolio. The reason stated was that gold isn’t a liability of any government or corporation, which means buyers are free to invest in it freely, as they have done so in the past.
According to research, gold’s return is around 5 percent since 1934, which is a pretty good ROI, especially for fixed income investment. It also serves as a buffer against downturn volatility. The research also shows the massive run-up of gold from 2004 to 2014, which meant it outperformed the S&P by 5%. However, a major increase like that always means that there’s a major decrease somewhere in the future, so buyers must be cautious about that.
If you consider a 30-year portfolio from July 1971 to February 2014, the S&P yielded just over 10% and gold yielded 9.53%. So, if you had roughly 30% of your portfolio in gold, you would have yielded almost 10% in a market with a lot less volatility.
So, What’s the Verdict?
The question we asked, in the beginning, was “Is gold a good investment?” However, like all things, it is up to you. Every investor has to evaluate his/her own financial situation and future goals before making that decision.
If you are following a modern portfolio theory, you should be investing in stocks and bonds mostly. But it might be a good idea to put a small percentage of your portfolio in gold for the long run. If you’re using gold as a contingency against downward market trends and following the principles of rebalancing the portfolio at key times, making quality investments, but not worrying about timing the market – then gold is a good thing to have in your portfolio.
Either of these situations can help you become financially successful. Considering historical facts, you will definitely make more money with a 100% equity portfolio, but it can also be quite risky. So, how high is your risk tolerance? If you’d like to balance the risk, and you don’t want to invest in traditional bonds or other fixed-income positions, gold may be a good alternative.