How Should Gold Be Viewed As An Investment?

Bill Keen is the Founder and CEO of Keen Wealth Advisors and the Best-Selling Author of Keen on Retirement.

With the market turbulence stemming from the Covid-19 pandemic, gold has become a hot topic of conversation in the investment world. You’ve probably seen commercials at this point trying to sell you gold coins or bars, or perhaps you have a “goldbug” in your family who talked your leg off at Sunday dinner about now being the perfect time to invest in gold.

So how should investors view gold? Should you invest now? Is everything you’re hearing and seeing simply marketing hype driven to a fever pitch because of an unstable market? Or can gold be a good investment?

Let me answer that last question right off the jump and then I’ll dive into the reasoning. Yes, there is room in a portfolio for gold, so long as you have perspective. (Full disclosure: I hold some exposure to gold through a commodities ETF.) Like any asset class, gold is not bulletproof. It’s not a magic cure-all against the forces trying to wipe out your wealth. It has its advantages and disadvantages, which are what we’ll look at in this article.

The History Of Gold

Gold has been intertwined with money, wealth and economic power for thousands of years. When gold was used to back paper currency, government officials were the ones setting the price.

President Richard Nixon ended the “gold standard” in 1971. Today, gold exists as its own entity that is market-driven, with gold buyers and sellers being the ones who dictate its price.

Proponents of the gold standard would argue that the economy had less debt and fewer deficits when gold backed the country’s paper currency. One of the reasons the U.S. moved away from that standard was because it limited the country’s economic growth. On the gold standard, the amount of money in the economy is tied to how much gold there is, which handcuffs growth. So, for example, the federal government would have had to purchase or mine more gold in April to finance the CARES Act if the country was still on the gold standard — not ideal for speedy relief. 

Why The Rush For Gold Now?

With some context, the picture becomes clearer as to why gold pops back up as an investment during times of crisis. I believe there are three main reasons gold is so hot right now.

First, it’s seen as a hedge against inflation. This was true in the 1970s, when gold had a 10-year run that saw its value rise from a little over $35 an ounce to nearly $525 an ounce. But then you look at the 1980s, when it dropped from an average closing price of $615 in 1980 to an average of $384 in 1990.

Its price hit a peak near $1,900 in 2011, only to see the value drop to around $1,049 in 2015 before rising to where it is now, hovering around $1,875 an ounce as of this writing. These peaks, valleys and troughs have been nearly impossible to predict, which throws cold water on the idea of gold as a hedge against inflation. In fact, if you take out the 1970s, when double digit inflation rates were the norm (the inflation rate was 2.3% at the end of 2019), the correlation between gold and inflation is quite weak.

However, there is a greater case to be made that gold is a hedge against financial crises, during which the value of stocks and bonds can crater, leaving investors devastated. Conversely, research shows that gold holds its value and does not move in sync with stocks.

This brings us to the final reason: fear. When the markets take a tumble, people panic and make short-sighted decisions, because fear has them in its grip. They’ll move their assets to gold because they reckon, if things get really bad, at least their gold will be worth something. But as I’ve discussed before, there are dangers of letting fear drive your investing decisions.

Approaching Gold As An Investment

This isn’t to say that gold is an investment to stay away from entirely. Aside from being stable during a crisis, gold is also highly liquid. If you need to cash out, you can — but be warned that, as The Balance notes, gold coins and bars are often bought at premium and sold at a discount. So, if you need to cash out your gold quickly, you could be taking a loss on your investment.

If you want to purchase physical gold (whether coins or bars), make sure you’re buying from a reputable source. If you’re looking to buy gold for your retirement portfolio, you’ll need two things: a broker to buy it and a custodian to keep it. If you’re buying gold with a plan to bury it in your backyard, think again.

Finally, think about gold as a piece of your overall investment portfolio. The general rule is that gold should constitute no more than 5%-10% of your portfolio.

This advice makes sense for one key reason: You don’t see massive ROI with gold. If you had invested $150 in gold in January 1968, you’d have an asset worth $1,345 in January 2018. An ROI of 796.7% isn’t bad! But if you invested $150 in the S&P 500 over that same period? You’d have $11,288.

So, let’s return to the question above: Should you invest in gold? The answer is “perhaps.” Talk with your financial advisor if you’re considering such a move. Unlike gold sellers looking to make a buck, your advisor will help you come up with a plan that makes sense given your goals.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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