Should You Own Gold as an Investment?
Written by: Paul Werlin, President, Human Capital Resources, Inc.
For thousands of years, virtually every civilization on earth has prized gold. It has been estimated that gold was first used as a medium of exchange around 1500 BC by the ancient Egyptians. People around the world covet its beauty and appreciate its valued. With gold having just reached an all-time high of $2,000 an ounce, the question is, should you own gold as an investment? While the question is simple, the answer is not easy to answer.
Many experts do recommend that gold represent from 5% to at most 10% of a well-diversified portfolio (along with international stocks, bonds, indexed finds, etc.). This means if you have $250,000 in investible assets, between $12,500 and $25,000 can be in gold. However, some professionals aren’t so sure about gold’s place in the average investor’s portfolio. To fully understand the pros and cons of investing in gold, there are a few things that must be understood. First, historically, gold has been thought of primarily as a hedge against inflation and uncertainty. When there’s little inflation, gold tends to lag the returns of other investments. And many would attribute the runup in gold prices this year to the uncertainties about the COVID crisis, the upcoming election, and so much economic uncertainty around the world. One also must remember, that physical gold pays no interest or dividends (like many stock and bonds) and in fact there can be a price associated with just storing any physical gold you may own (like fees for a bank safe deposit box).
We also need to understand there are different ways to own gold. Individuals can buy gold bullion (bars), gold coins issued by countries like the US and Canada (American Gold Eagles, Canadian Maple Leafs). For many gold investors, there's no alternative to having actual physical metal in your possession. Just remember you pay a small fee to buy physical gold and sell as well, typically (a very small percentage of the price — the “spread” between the “bid” price and the “asked” price) and they can be purchased from many gold and bullion dealers. Some investors prefer to buy gold coins for their rarity as well as their gold value. Rare gold coins can be worth much more than the value of the metal depending on their scarcity. Reputable coin dealers are the place to go. But of course whether bullion or rare, gold can go up and down in value.
If you don’t need to be able to physically hold your gold, there are other options. There are gold ETFs (exchange traded funds) and mutual funds that make it easy to buy and sell gold directly in an investment account. Just do a search on “gold etf” or and “gold mutual funds” on the internet and you'll see many investments that are designed to track the price of gold, precious metals and gold mining companies (and various combinations). Of course, these investments do come with management fees and other expenses that need to be evaluated.
For those willing to take more risk, gold futures contracts are an option. With futures, you own the right to buy a specified amount of gold (say 100 ozs), at a fixed price for a specified time period. For most investors, the risks and dollars involved are just too great with futures.
Lastly, owning gold mining stocks is another choice, but there really isn’t an exact relationship between the price of gold and the price of gold mining companies. This is because most gold miners also mine other minerals as well — silver and copper just to name two. Also, miners are businesses like any other that can have problems with everything from miner strikes, civil unrest in the countries they have operations, and hundreds of other problems. But gold mining stocks are still one way to have some exposure to the price of gold.
There’s no doubt that many believe owning at least some gold is smart. Historically, it’s been a good hedge against inflation, a refuge for safety in uncertain times, and a way to protect other financial assets. And of course, it is beautiful. Should it be in your portfolio? Well, that’s for you and your financial advisor to decide.