Is gold a good investment?

Why do people invest in gold?

According to a 2023 Gallup survey, 26% of Americans feel gold is the best long-term investment option, beating out other assets such as stocks, bonds and savings accounts.

Gold has been around for thousands of years, with the first gold coins tracing back to around 500 B.C. In addition to historic and cultural value, gold has held its value relative to most national currencies over time. This makes it a “safe haven” asset that many investors prefer during times of uncertainty.

Gold has become more popular in recent years due to the ease of trading it through the stock market, as well as its role as an asset that preserves buying power. And in inflationary environments, gold acts as a hedge, going up in value when things get more expensive.

Advantages of investing in gold

Investors see gold as a safe place to hold money in volatile markets. Here are a few of the advantages of investing in gold:

Gold may be a good investment for people looking to diversify their portfolio or who are worried about economic uncertainty.

Hedge against inflation

When inflation rises, many investors flee to gold because they believe it will preserve their buying power over time versus losing out to inflation. When prices start to rise, gold may follow suit. And while the stock market may go down during times of high inflation, gold is seen as an inversely correlated asset.

Protection against weak national currency

Gold is seen as a “store of value,” holding its purchasing power over time. When a currency is weakened due to inflation, poor economic conditions or other reasons, gold tends to rise in value. For example, if the U.S. dollar starts to lose value against other national currencies, investors may move to gold to preserve the value of their savings. This can cause gold prices to rise from the increased demand.

Portfolio diversification

Gold is an alternative asset that can add diversity to an investment portfolio. In addition to its properties as an inflation hedge, gold price movements may be uncorrelated with other investments, helping bolster an investment portfolio that may be suffering losses in other asset classes.

Timeless asset

Gold has been around longer than most other assets. An abundance of gold has signified wealth in many countries and cultures and continues to provide value around the world. Gold is a finite asset and looks to continue being a popular investment for years to come.

Safe haven during economic or political uncertainty

When a country is having major political turmoil or economic uncertainty, gold is seen as a safe haven for investors. Gold isn’t as affected by local economic or political conditions, such as if a currency is devalued due to excessive money printing by the government or if political upheaval causes investors to pull out of local markets. In fact, when times are uncertain, gold tends to rise in value.

Disadvantages of investing in gold

While investing in gold can be a great way to diversify your holdings and protect against inflation, it’s not always the best investment choice. Here are a few of the disadvantages of investing in gold:

Gold may not be right for investors with a low risk tolerance or who want to earn passive income from their investments.

Price volatility

While gold tends to do well in poor economic conditions, the price of gold can fluctuate wildly from day to day and week to week. Investing in gold is only recommended for long-term investors. If you don’t have the stomach for large swings in the price of gold, it may not be the best investment for you.

Doesn’t outperform stocks in the long run

While gold can hold value over time and generally rises in price more than inflation, it doesn’t usually outperform other assets like stocks. Historically, gold has averaged around 7.8% in annual returns, while the stock market has averaged closer to 10%. If you disproportionately own gold in your portfolio, this can have a big impact on your overall returns.

No dividends

Investing in gold does not earn any passive income, as gold is not a productive asset that earns a profit. This means investing in physical gold or gold exchange-traded funds (ETFs) won’t earn you any dividends or other types of income. The only exception would be investing in gold-adjacent stocks or ETFs, such as gold mining or production stocks, which may pay out a dividend.

You might pay more in taxes

“It's important to note that the IRS may consider physical gold a precious metal, defining it as a ‘collectible’ for income tax purposes,” said Arielle Tucker, a certified financial planner (CFP) at Connected Financial Planning.

“Therefore, carefully consider the tax implications of holding physical gold as a collectible versus an ETF with capital gain treatment. Collectibles are subject to a higher tax rate of 28%. Understanding these tax considerations is essential for making informed decisions about your gold investment strategy.”

Ways to invest in gold

There are several ways to invest in gold, including through physical gold (bullion) and through the stock market. Here’s how:

• Physical gold: You can purchase physical gold through online retailers, in person at a gold dealer or directly from the U.S. Mint. You can purchase gold bars (ingots) or gold coins in various weights and purity.
• Gold ETFs and mutual funds: Gold ETFs allow you to purchase a fund that tracks the price of gold. Many gold ETFs also are backed by physical gold bullion. ETFs let you invest small amounts and have relatively low fees. Gold mutual funds are similar but may own gold, gold stocks and other assets within them. Most stock trading apps and online brokers give you access to gold ETFs, and most major brokers offer gold mutual funds.
• Gold stocks: Instead of owning gold directly, you can own stocks in companies that mine and process gold. Gold mining stocks give you exposure to the business side of gold and can be purchased through most online brokers.
• Gold futures: A more advanced gold investment is gold futures contracts. You can buy and sell contracts based on the price of gold in the future (hence “futures”). Trading gold futures can be complicated, and there is more volatility and risk involved as well.

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Should I invest in gold?

Investing in gold can be a good idea for a number of reasons, but it’s important to understand your investment goals, risk tolerance and time horizon before choosing any kind of investment. Creating an investment strategy you can stick to and a portfolio you are comfortable with is essential before you start adding alternative assets to it.

“If you seek enhanced diversification and an asset class with an inverse correlation to the stock market (meaning it tends to perform opposite to stocks), integrating gold into your portfolio can be advantageous,” Tucker said.

“The recommended allocation typically falls within the range of 1% to 5% of your portfolio. While gold can contribute to diversification, it's essential not to overcommit, as historical data suggests that gold tends to underperform against the broader market. Achieving the right balance within a well-diversified portfolio is crucial for optimizing your investment strategy.”

» MORE: What is a good investment?

Bottom line

Gold can be a good investment for many reasons. It tends to rise in value when the economy is shaky or when inflation is high and is seen as a safe haven asset. Adding gold to your portfolio can be a great way to diversify your holdings and hedge against rising prices and volatile markets.

But gold hasn’t performed as well as the stock market historically, and it shouldn’t be the main holding in your long-term portfolio. It’s important to understand your investment goals and risk tolerance before investing in gold to ensure it meets your expectations and investment needs.