Gold has been admired for centuries as a symbol of wealth, power, and security. But today it’s an investment that can help you protect your wealth and even diversify your portfolio.
It has been around forever—literally. From ancient civilizations using it as currency to becoming a go-to in times of economic uncertainty, gold’s value has stood the test of time. While we’re not using it to buy supplies and groceries, it can still be considered a solid investment because of its durability, rarity, and ability to maintain value even when paper money falters.
If you’ve ever wondered whether investing in gold is right for you, this guide will cover what you need to know about what it represents in today’s world so you can make a smart decision about adding a little “shine” to your investments.
Why Is Gold Valuable?
There’s more to gold than just its shiny appearance. Its value is rooted in both physical properties and what it represents to investors.
As a rare, durable, and tangible asset, gold has been sought after for centuries. Its ability to withstand the test of time and maintain its value makes it a popular choice for investors seeking wealth preservation and safety during uncertain economic times. Unlike other investments that can fluctuate in value, gold has consistently proven to be a reliable store of value that can offer a sense of security and stability in our fast-paced world.
What Drives Gold Prices?
You’ve probably heard that gold prices can go up and down, and like any investment, there are reasons behind those changes.
- Interest Rates Matter: When central banks lower interest rates like the Federal Reserve just did, gold looks more attractive. Why? Because unlike bonds, gold doesn’t pay interest. When interest rates are low, you’re not missing out on as much by holding gold. This is why you’ve heard a lot about it in the news in the past week or so.
- Inflation Protection: Gold can be used as a hedge against inflation. When the value of your paper money decreases, gold’s price tends to rise, helping you preserve your purchasing power.
- Economic and Political Uncertainty: In times of recession or geopolitical issues, investors tend to land back on gold with it being seen as a safety net during tough times.
- Supply and Demand: Obviously, gold isn’t easy to find and you’re not going to just stumble across it. Mining operations are becoming more expensive due to regulations, and this supply constraint—combined with steady demand—helps push gold prices higher over time.
Watch last week’s Wealth Strategies Unleashed episode to hear more updates about the market’s Fall activity:
How Can You Invest in Gold?
Here’s a look at the most common options when it comes to ways people invest gold:
Physical Gold
Owning physical gold is considered a traditional way to invest. Whether you’re holding a gold bar or a coin, you’ll literally feel the weight of your investment.
- Bars and Coins: You can buy gold in bars, which come in various sizes. Coins, like the American Gold Eagle, might cost a bit more due to their collectible value, but they’re widely available and easy to trade.
- Rounds: These are coin-shaped pieces of gold made by private mints, but they don’t have face value like government-minted coins. They can be a cheaper way to own physical gold.
Gold Mining Stocks
If you don’t want to own actual gold, investing in companies that mine gold is another option. These stocks allow you to benefit from gold prices without having to store anything.
- Mining Stocks: Companies like Newmont or Barrick Gold for example mine gold, and you can buy shares in them. While these stocks tend to rise and fall with gold prices, they also depend on the company’s performance and risks like management issues or political unrest in mining regions.
- Gold ETFs: An exchange-traded fund (ETF) is a unique way to invest in a group of gold mining companies all at once. It’s a simple way to get exposure to gold without buying individual stocks.
Gold-backed ETFs
What about being able to invest in gold without the hassle of owning and storing physical bars or coins? Gold-backed ETFs hold actual gold in vaults and are traded on exchanges just like regular stocks.
With these, you’re buying shares in a fund that holds physical gold. The price of your shares tracks the spot price of gold, so it’s an easy way to gain exposure to the metal without worrying about storage or security.
Gold Futures and Options
Futures and options might sound fancy, but they’re simply contracts that let you bet on where gold prices are headed. These are more advanced tools for people who have experience in the market.
- Futures Contracts: These let you buy or sell gold at a set price in the future. It’s high-risk but high-reward if you know what you’re doing.
- Options: These give you the right (but not the obligation) to buy or sell gold at a specific price. It’s a way to hedge against price changes, but it’s also riskier than owning physical gold or ETFs.
Pros and Cons of Investing in Physical Gold
Thinking of buying physical gold? Before you do, it’s important to weigh the benefits and drawbacks.
Pros
- You own something real, and that can feel reassuring during uncertain times.
- Physical gold isn’t tied to any company’s success or financial system.
- Gold has been a safe bet for holding value over the long term.
Cons
- You’ll need a safe place to store your gold, whether that’s a high-quality safe at home or a vault with a third party.
- You’ll usually pay more than the spot price to buy physical gold, and selling can also involve costs.
- Selling physical gold isn’t always as quick as selling stocks or ETFs.
Risks of Investing in Gold
While gold is considered by many to be a stable investment, it’s important to be aware of its potential drawbacks.
Gold prices can fluctuate in response to factors such as interest rates and geopolitical events, making it less predictable than some investors may believe or realize. Additionally, selling physical gold quickly can be challenging and you may not always receive the full market value, especially for less common types of gold.
Finally, the gold market is not immune to scams, and investors should exercise caution when dealing with unfamiliar dealers, particularly when considering gold certificates.
Check out this Wealth Strategies Unleashed episode that goes further on scams and exercising caution with personal finance.
Common Gold Investment Mistakes to Avoid
Like any investment, there are mistakes to watch out for when investing in gold:
- Overinvesting: Gold is a great way to diversify, but don’t put all your money in one basket. It’d be smart to consider keeping gold to a small portion of your portfolio.
- Forgetting Storage Costs: If you’re buying physical gold, remember to factor in storage and security expenses—they can eat into your returns over time.
- Not Doing Enough Research: Gold comes in many forms, and not all are created equal. Make sure you fully understand the type of gold you’re buying before diving in.
Gold Investment Strategies for Different Types of Investors
Whether you’re new to investing or have years of experience, gold can fit into your strategy.
If you’re just starting out, you might consider gold-backed ETFs or buying smaller amounts of physical gold since they’re intrinsically easier to manage.
More experienced investors might want to explore mining stocks or even futures and options if they’re comfortable with higher risks.
If you’re looking to preserve wealth, holding gold long-term as a store of value can be a smart move. Meanwhile, day traders might look to profit from short-term price swings.
Whether you’re interested in owning physical gold, buying stocks, or investing in ETFs, understanding the ins and outs of gold can help you make informed decisions. Whatever strategy you choose, gold can offer stability and flexibility as part of a well-rounded investment plan.
