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With recent high inflation, many investors are asking whether gold still makes sense. The short answer: gold works best as portfolio insurance and a diversifier, not as a growth investment. Over long periods it has underperformed stocks, so it’s most appropriate for conservative investors who want stability or a hedge against currency devaluation.
What gold investing means
Investing in gold can mean buying the metal itself, purchasing gold-backed ETFs, or buying shares in gold-mining companies. Unlike stocks or bonds, gold doesn’t produce income through dividends or interest. Its value rests on broad agreement that gold is valuable plus its limited supply, which is why it can hold or gain value despite offering no yield.
A brief history
Gold’s role changed in 1971 when the U.S. ended dollar convertibility to gold, effectively ending the gold standard. After that shift, gold prices rose in the 1970s and 1980s and then were fairly flat for long stretches. Gold hasn’t been a perfect inflation hedge and usually trails equities, but its diversification benefits justify a small allocation in a balanced portfolio.
Ways to buy gold
– Physical gold: bars and coins from dealers or the U.S. Mint. Some apps let you buy fractional gold or store it for a fee, or let you take physical possession.
– ETFs and funds: funds like SPDR Gold Shares (GLD) and others offer low-cost exposure. Some funds, like certain closed-end trusts, let holders redeem units for physical metal.
– Mining stocks and ETFs: you can buy shares in gold miners or an ETF that tracks a miners’ index.
– Futures and derivatives: these require more experience and are best left to sophisticated traders.
Coins vs. bars
Coins tend to be more liquid and easier to authenticate; bars are usually cheaper per ounce. If you can’t afford a full bar, fractional options are available through some platforms. For many investors, a mix of both makes sense.
Is gold an inflation hedge?
The relationship between gold and inflation is mixed. Over some periods gold rose with inflation; in others it rose while inflation was low. Studies comparing inflation hedges found real estate and Treasury Inflation-Protected Securities (TIPS) to be more consistent hedges than gold. In short, gold may help in some inflationary environments, but it is not a reliable, consistent hedge.
Performance and practical considerations
Historically, stocks have outperformed gold over long horizons. For example, over many decades the S&P 500 has delivered stronger annualized returns than gold. Physical gold usually sells at a premium and carries storage and insurance costs. It is also taxed as a collectible for U.S. investors, which can mean higher tax rates on gains. Gold can be volatile, and its risk/reward profile is generally weaker than that of stocks.
How to use gold in a portfolio
Short-term investors may prefer funds or futures because they are easier to trade. Long-term investors seeking capital appreciation typically do better with stocks. Many investors combine approaches: hold a small amount of physical gold as a safety net, own a gold ETF for diversification, and buy mining stocks for growth exposure. A modest allocation—often suggested in the 5% to 10% range for speculative or alternative assets—keeps gold’s stabilizing benefits without dragging down long-term returns.
Risks and downsides
Physical gold poses storage and theft risks, and counterfeits exist. There are also dealer markups, certification fees, and tax implications. Some of these issues can be eased by using reputable online custodial services, but those add costs and counterparty considerations.
Conclusion
Gold is best seen as portfolio insurance and a diversifier rather than a primary growth asset. It can smooth volatility and preserve value in extreme scenarios, but it comes with fees, taxes, and long stretches of mediocre returns. Treat gold as a limited, strategic holding while building long-term wealth through stocks, real estate, and other productive assets.
