Gold has the deserved reputation of being an asset that stores value and acts as a hedge against inflation. Analysis by personal finance and investment expert Steven Keys shows that since the 1970s, $10 000 worth of gold in 1974 would have cost you about $180 per troy ounce – and it would now be worth about $84 000. That translates into an average annual return of about 4.8% per year, a real after-inflation return of 1.2% annually. This investment performance track record shows gold has outperformed inflation over that period, preserving wealth through good times and bad.
Compared with the performance of the S&P 500 Index, gold’s performance looks less convincing. The benchmark US stock market index delivered annual average returns of 12% after dividends were reinvested, which translates into about 8.1% after inflation – almost seven percentage points more every year over the same period.
However, for investors who can’t tolerate the historically higher volatility of stock markets, gold has provided shelter from the storm during market crashes. In six of the eight past recessions in the last four decades, the gold price has risen when equities have crashed. For instance, in the 2008 great financial crisis, the gold price increased by 25.5% while the S&P500 fell 56.8%, according to GoldSilver.
Another compelling characteristic of gold is that it doesn’t behave in the same way as the other asset classes. Instead, it acts as a counterweight to those asset classes. For instance, when stock prices or the dollar weaken, gold prices typically rise and vice versa. Thus, gold offers attractive investment portfolio diversification, reducing its overall risk profile.
Right now, risks are particularly heightened in a global environment where the threat of worldwide recession and an ongoing war in Ukraine shroud the outlook for the future. Interest rates have soared over the past year, and there is no certainty about when they will come back again and whether they will be to previous levels. Geopolitical tensions between the Western developed economies and China and Russia add to this period of extreme unpredictability.
So, if you are asking yourself the question, “Should I invest in gold now?”, it is certainly worth giving serious consideration to building a gold portfolio that can tide you over during these challenging times. It may even be worth adding silver to the mix and building a precious metal portfolio.
How and Where to Invest In Gold
There are several ways to invest in gold directly or indirectly, and each of these should be considered for their different characteristics and return potential.
If you prefer the tangibility of gold, you can invest in gold bars, gold coins or jewellery. You can also get indirect exposure to gold by investing in gold stocks, mutual funds or exchange-traded funds (ETFs). These are traded on stock exchanges or offered by investment managers and present an entirely different investment case but do offer gold exposure.
Investing in gold bars, also referred to as bullion, is the time-honoured way to invest in gold because its value has endured since it was discovered 5 000 years ago. Gold’s value is inherent, and its price is never related to any other asset or government fiat.
If you want to invest in bullion, you need to buy the bars from a dealer, who will charge a premium above the prevailing gold price. That’s just one of the invisible costs of investing in gold bars. Others include storage costs and insurance to keep the bars secure.
Buying gold coins is also a popular way to add gold to your precious metal portfolio. They are collectible and easily transportable, but they do come at a premium of between 1% and 3% of gold’s spot price.
Some gold coins are 22-karat pure gold, and others have 90%-plus gold by weight. The Britannia, Canadian Maple Leaf, and American Buffalo coins are pure gold, while the American Gold Eagle and the South African Krugerrand have 91.7% gold by weight, with the remainder of the coin silver and copper.
But where can you buy gold coins? Gold coins are best purchased from a reputable dealer or a financial institution because then you are guaranteed the authenticity and quality of the gold in the coin. The coins come in one, one-half, one-quarter, and one-tenth-ounce denominations.
You may also be asking yourself, should I invest in gold companies? Gold stocks are another way to get indirect exposure to gold, and they have certain benefits that investors don’t access when investing in physical gold. For instance, they offer investors attractive capital appreciation potential if they choose the right company. They pay out dividends, giving an investor an income stream that is not available if you invest in physical gold.
However, before investing in gold stocks, you need to do your homework to find a company with the best growth potential and the least risk of underperforming other gold companies and investment alternatives.
Buying gold stocks is straightforward. You can buy them from a stockbroker and hold them in your stock market portfolio until you decide to sell. Listed assets, like shares, are liquid, which means you can buy and sell them quickly at the prevailing price.
Other ways of getting indirect exposure to gold are investing in mutual funds with gold companies in their portfolios and gold ETFs, which either invest in gold directly or in gold companies.
With all these different options, you may also ask the question, how much gold can I buy? Though gold is a finite resource, realistically, there are no limits to how much you can invest in any of these alternatives. Instead, the key consideration should be how much to invest in gold.
How Much Gold Should Be in Your Portfolio?
A key question you need to answer is, how much gold should I own? It’s generally agreed that investors should limit their exposure to gold to between 5% and 10%. However, another analysis by the CPM Group identifies the sweet spot for gold in a precious metal portfolio to be 20%. Ultimately the extent to which you invest in gold is a personal decision and one that is in accordance with your overall investment objectives and longer-term financial goals.
All investment portfolios benefit from diversification, and investing in gold does just that. Movements in the gold price have historically been uncorrelated to other assets such as bonds, equities, real estate investments and other alternative, unlisted assets. The inverse relationship to equities, which usually comprise the biggest part of any investment portfolio, is historically significant, especially during market sell-offs. Since 1884, the negative equity-gold correlation has exceeded -50% in 1987, 1990, 1993, 2001, 2002, 2003, and 2008. In 2021, the 65-day correlation was -58% – its most negative correlation since 2003.
The gold price is also uncorrelated to the dollar because, in times of uncertainty, investors buy gold denominated in dollars, and, depending on how much of the currency is sold globally, the dollar weakens. Gold also provides a hedge against inflation – a highly attractive attribute in the current environment where inflation is proving stickier than expected this year. The precious metal also holds investors in good stead during tough economic times.
Silver or Gold?
For investors considering expanding their precious metal portfolio beyond gold, silver is also an option because it has the same physical advantages as gold – it’s something you can hold directly, it is a finite resource and is not tied to the fortunes of the listed financial markets.
So, if you are wondering if you should I invest in gold or silver, there are several things to consider.
Firstly, although both are defined as precious metals, there are different driving factors that determine their prices. Gold is predominantly an investment asset, whereas silver, historically considered the poor man’s gold, is predominantly used in industry. Whereas industrial demand for gold comprises a mere 12% of the total demand for the metal, 55% of the demand for silver is for industrial use. Thus, silver’s fortunes are more closely tied to the economy, with its price rising and falling as manufacturing activity waxes and wanes.
Historically, silver has been more volatile and geared to listed financial markets than gold, rising more in bull markets but falling more in bear markets. Silver costs less per ounce than gold so you can buy more of the precious metal than gold for a set amount. You can also buy small quantities regularly to build up your silver holding. On the downside, silver costs far more to store than gold, taking up to 128 times more storage space.