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What do Scrooge McDuck and King Midas have in common? Hint: It’s not a well-diversified portfolio. While owning gold sounds cool, and may even be considered responsible during a stock market downturn, investing in gold comes with some unique challenges and doesn’t always pan out the way you might expect.
Is gold a good investment in a recession?
Gold has a reputation for being a recession-friendly investment — when the stock market has a big pullback, the price of gold often goes up. But that's not the full picture, says Deaton Smith, a certified financial planner and founder of Thayer Financial in Hickory, North Carolina. “The idea is that it’s a safer investment than equities, but the long-term price valuations just haven’t been there.”
In fact, when you look at longer time horizons, like the past 30 years, the Dow Jones Industrial Average — a good representation of the overall stock market — has significantly outperformed gold. And while the stock market has its ups and downs, investing in physical gold can involve a lot of unexpected costs and considerations, including insurance and secure storage.
Adding gold to your portfolio can help you diversify your assets, which can help you better weather a recession, but gold does not produce cash flow like other assets, and should be added to your investment mix in a limited quantity and with caution.
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4 ways to invest in gold
1. Physical gold
Also called “bullion,” this is what most people picture when they think about investing in gold. Gold bars, gold coins, hunks of pure gold and jewelry: It’s the stuff of treasure chests and bank heists. And even though it may be the most exciting way to invest in gold, it’s also the most challenging to buy, store and sell.
A note about gold jewelry: While jewelry can sometimes accumulate value over time, appraising it can be complicated, and there are no guarantees you’ll be able to sell a piece for more than you bought it for. “A lot of people purchase jewelry and then want to sell it back to the business,” says Smith. “There’s a pretty decent markup on jewelry, and the resale value is nowhere close to what you’re buying.”
2. Gold stocks
Just like buying any individual stock, buying stock in a gold-mining company comes with some risk, but it means you have complete control over which specific companies you invest in. For example, some investors might opt for a gold-mining company that practices strong environmental responsibility over one that does not. And while owning stock won’t let you hold gold in your hand, it does mean you have the benefit of an asset you can sell at any time. Learn more about stocks.
3. Gold funds
Investing in gold mutual funds means you own shares in multiple gold-related assets, like many companies that mine or process gold, but you don’t own the actual gold or individual stocks yourself. Gold exchange-traded funds or mutual funds have more liquidity than owning physical gold and offer a level of diversification that a single stock does not. ETFs and mutual funds also come with certain legal protections. Be aware that some funds will have management fees. Learn more about ETFs and mutual funds.
4. Gold futures
A gold futures contract is an agreement to buy or sell a certain amount of gold at a later date. The contract itself is what is traded on an exchange. Gold futures enjoy more liquidity than physical gold and no management fees, though brokerages may charge a trade fee (also called a commission) per contract. Keep in mind, trading futures contracts involves a lot of risk and isn’t a suitable investment option for an inexperienced investor. The amount of money you can lose with these investments can exceed your original investment. Read more about futures.
How to buy gold stocks, mutual funds and ETFs
Investing in a gold stock, ETF or mutual fund is often the best way to get exposure to gold in your portfolio.
In order to buy a gold stock or fund, you’ll need a brokerage account, which you can open with an online broker (here’s a step-by-step guide to opening a brokerage account). Once your account is funded, you’ll be able to pick the gold-related assets you’d like to invest in and place an order for them on your broker’s website.
Keep in mind that individual stocks and ETFs are purchased for their share price — which can range from $10 or less to four figures — but mutual funds have a minimum investment requirement, often of $1,000 or more. Learn more about how to invest in stocks and how to invest in mutual funds.
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Gold investments and diversification
One benefit of gold investments is that they can help diversify your portfolio. Diversification refers to investing in a range of assets across a variety of industries, company sizes and geographic areas. Owning stock in a gold mining company or a gold ETF exposes you to the gold industry, and since gold does not necessarily move in tandem with the stock market, it can help further diversify your holdings. Of course, if your entire portfolio is made up of gold investments, it won’t be diversified at all.
How to buy physical gold
If you decide that investing in physical gold is the right move for you, here are some things to keep in mind.
1. Find a reputable dealer. From working with pushy salespeople to falling victim to scams, navigating the world of buying and selling gold can be sketchy. Sellers can inflate their product’s value, or use persuasion tactics to create a sense of urgency to buy immediately. Doing some homework ahead of time can help you avoid a bad investment.
You can use the National Futures Association’s Background Affiliation Status Information Center to check on a firm or individual’s background.
2. Watch out for fees. Gold dealers typically charge more than gold’s “spot price,” or the price at which gold trades on a commodities exchange. This premium typically consists of a dealer’s fee and manufacturing and distribution charges.
3. Find secure storage. People joke about burying gold for a reason: It’s valuable, and because it's a physical commodity, people may try to steal it. It’s important to anticipate storing your gold somewhere safe, whether that is a literal safe or a safety deposit box at a bank. Storing gold safely can get expensive. Depending on their size, safety deposit boxes at a bank can run from $30 to a couple hundred dollars a year.
4. Consider purchasing insurance. Insurance is an additional cost of owning physical gold. If you purchase insurance, be sure your policy covers the exact type of asset you have.
5. Know your investment is illiquid. Unlike gold stocks and funds, it may be tough to resell physical gold. Pawnshops aren’t known for their fair pricing, and if you sell your gold back to a dealer, you’ll likely sell for below the gold’s spot price.
You can buy gold, but should you?
Despite its age-old allure, gold isn’t always the strong investment that movies and TV shows may have led you to believe.
“I advise all of my clients to stay away from investing in gold,” says Smith. “Gold is a speculative investment and has a very poor long-term performance record. For individuals that still move forward on purchasing gold, buying gold in the form of a tradable security is a much easier and cheaper way of incorporating it into a portfolio.”
Deaton Smith, CFP
I advise all of my clients to stay away from investing in gold. Gold is a speculative investment and has a very poor long-term performance record.”
But while he’s clear that he doesn’t think investing in gold is a good idea, Smith does acknowledge the draw the physical metal can have. “There’s something comforting about being able to touch what you own. You don’t get that if you own a part of Johnson & Johnson.”
Greg Young, a CFP and founder of Ahead Full Wealth Management in North Kingstown, Rhode Island, agrees. “People like gold because it’s so easy to understand,” he says. “But anytime someone insists on a specific asset, there is an underlying emotional rationale.”
In many cases, that emotion is fear of stock market fluctuations. But just because gold is a commodity you can hold doesn’t make it a smarter investment. When the movements of the stock market are making you nervous, try to take a long-term view and remember that market volatility is normal. Often, the best thing you can do for your portfolio is stick to your investment plan, not rush out and buy gold bars.