Perhaps it would be best to say gold is less of an investment, and more of a store of value. It doesn’t pay interest or dividends, and it would hardly qualify as an all-weather investment. On the other hand, after trading at a fixed price of $35 per ounce through 1971, it’s now valued at over $1,300
. That means the value of the metal has increased by a factor of 37 in the past 40 years.
Even if gold isn’t an investment in the strict sense, that kind of price performance can’t be ignored. And for that reason, you may want to consider adding some gold to your investment portfolio.
When and why to buy gold
Whether gold qualifies as a legitimate investment or not, it’s quite clear that it’s more than kept up with inflation. For example, in January, 1970, the median price of a house in the US was $23,600. At $35 an ounce, it took 674 ounces of gold to buy a median priced home.
By the end of 2017, the median price of a house had risen to $248,800. At roughly $1,300, it now takes only 191 ounces of gold to buy the median priced home.
Put another way, the value of gold has increased 3.5 times faster than the cost of a median priced house since 1970. That’s not as dramatic as some other investments, but it’s an excellent return nonetheless.
That’s why gold can’t be ignored, despite the claims of its detractors.
Gold is mostly a crisis investment
While serving mostly as a store of value, gold has also proven to be a winning investment during uncertain times.
Based on historic performance, it’s clear that gold is more erratic than other investments. For example, it performed very well during the 1970s, rising from $35 in 1970, to a high at $850 in 1980. It dropped about 50 percent shortly thereafter, then languished for most of the 1980s and 1990s.
It then went from a near-term low of $252 in 1999, to an all-time high of over $1,900 per ounce in 2011, rising by a factor of nearly eight in 11 years.
It’s come down about one-third from those highs, and has been range-bound ever since. What we’ve seen then are two time frames, the decade of the 1970s, and a 12 year span from 1999 through 2011, in which gold went parabolic. In other decades, it was either flat or gradually declining.
That performance is not insignificant. The 1970s were characterized by a lack of confidence in both the US dollar and the US government, leading to consistent inflation. The period from 1999 through 2011 experienced two major stock market crashes and two deep recessions—the dot-com bust and the Financial Meltdown.
It’s not a coincidence that gold had its best performances during those two specific time frames. It virtually went to sleep (or declined) in other decades. But it performed especially well during the two time frames when confidence in both the financial system and other investments was especially low.
This is why some gold advocates have referred to the metal as a countercyclical investment. It tends to perform best in times of crisis, and especially when confidence in the system overall is low.
That makes it worth considering as an addition to your portfolio.
How gold has performed against other investments
The website Engineered Portfolio.com has done an exhaustive analysis comparing the performance of various asset classes between 1972 in 2016.
The results are as follows, net of an average annual rate of inflation of 4.0 percent:
- Real estate investment trusts (REITs), 9.2 percent
- U.S. stocks, 7.7 percent
- Gold, 6.3 percent
- Commodities, 4.8 percent
- Long-term treasuries, 4.2 percent
- U.S. Bonds, 3.2 percent
It shouldn’t be a surprise that REITs outperformed the field, given that real estate is typically leveraged. Stocks have clearly outperformed gold over the long-term, but it’s also clear that gold was the winner in those more difficult decades when conventional investments didn’t perform well.
Those performances have reinforced gold as a safe haven asset, particularly favored by international investors during times of crisis.
Since we can never know when a prolonged time of underperformance by conventional investments will begin, it can make sense to hold at least a small position in gold at all times.
What we do know is that all financial markets run in cycles. The current bull market in stocks that began in 2009 has seen the value of stocks roughly quadruple in just nine years. While it may be tempting to assume this performance will continue forever, the history books don’t support that assumption.
A prolonged downturn in the financial markets, particularly stocks and bonds, could ignite the price of gold. And any time you plan to buy into an asset class, it’s always best to do so when the price is stable. If you wait until a crisis causes gold to rise, you could miss out on the best buying opportunity.
The best ways to buy gold
What’s the best way to hold gold? There are several ways to invest in gold. Which you decide on should be based on your own preferences.
These can be purchased in denominations of one ounce, half an ounce, quarter ounce, and 1/10 ounce coins. There are various coins, including the American Eagle, Canadian Maple Leaf, and South African Krugerand. They typically sell at markups of anywhere between 4 percent and 10 percent of their bullion content.
Gold coins have the advantage that you can take physical possession of them. They’re also completely portable. On the downside, storage can be an issue. There’s always the threat of theft, as well as destruction by fire or earthquake. It’s generally advised to have them insured against loss.
These are for investors who want to hold the actual metal, but want to take a position that’s too large for individual coins. You can purchase them in sizes ranging from half a gram to one kilo. They can be purchased at large dealers (see above).
The advantage of gold bars is that they have lower price markups than coins. The disadvantage is that they aren’t divisible the way coins are, and must be purchased in large amounts. For this reason, they’re not suitable for small investors.
These are essentially index funds for gold. A gold ETF is invested primarily or exclusively the metal. It’s an opportunity to invest in gold, without taking physical custody of the investment. The two largest gold ETF’s are SPDR Gold Shares and iShares Gold Trust (IAU). They can be purchased through investment brokers.
Non-bullion Gold investments
You can also invest in paper assets of companies engaged in gold production. These are not like investing in the metal itself, but rather in the business side of production. Though they can often outperform the metal itself, they can just as easily underperform it.
These are stocks in gold mining companies, and not in the metal itself. Though they have an approximate tie with the gold price, they’re also subject to all of the risks and pressures of any business. That can include the risks of unproductive mines, labor strikes, political unrest in countries where production is taking place, and changes in foreign currency exchange rates.
Gold stocks are extremely risky, and are speculations at best. They tend to perform best when gold is in a prolonged bull market. They can represent a diversification within an overall gold position, but should not be mistaken for the metal itself.
Gold mutual funds
As you might expect, these are funds that hold the stock of several gold mining companies. They’re somewhat less risky than individual gold stocks, because they hold only the better performing companies. Some also take a limited position in the metal itself. But just like gold stocks, they perform best in prolonged bull markets in gold, but do poorly when gold is in decline.
Since gold only performs well in very specific markets, it’s best to hold a very small percentage of your portfolio in it. It’s generally recommended that you not invest more than five percent to 10 percent of your portfolio in precious metals.
Investing in the metal is the best course. You should plan to hold gold bullion coins or gold bars if you want to hold the metal itself. Alternatively, you can invest in a gold ETF, which you can hold in your portfolio just as you would any other security.
Gold stocks and mutual funds are best avoided, unless you’re looking for diversification during a run up in gold prices. These are special circumstance investments, and not meant to be held permanently.
If you’ve never invested in gold before, do plenty of research before moving forward. But with the financial markets being at record levels, and gold being calm for several years, this is a good time to take the plunge. Just don’t get carried away, and load up your portfolio with gold and gold related assets. If the bull market in financial assets continues, gold will mostly stagnate.
- How to Invest in Gold: A Beginner’s Guide
- How To Invest