Since 1970, there is one investment that’s steadily increased over time: gold. That’s why we want to give you three tips to investing in gold.
As an investor — whether seasoned or a beginner — you have to be aware of market volatility and, more importantly, how to guard against it with safe-haven assets like gold.
While the gold market nears record highs, it still might be a good time to invest as it continues to trend upward with room to run.
That’s why it’s important to know why gold can be an investment, the different types of gold investments, when and how much to invest.
Understanding Gold as an Investment
When it comes to gold, one thing to remember is that at one point, even U.S. currency was backed by gold — known as the Gold Standard. This meant Americans could trade $20.67 for an ounce of gold, whereas today, 50 years later, gold is trading around $1,560 an ounce.
That all changed when the U.S. abandoned the Gold Standard in 1933 following the Great Depression as banks experienced a run on gold reserves. President Franklin Roosevelt required all banks to relinquish their gold to the Federal Reserve and for Americans to turn in their gold in exchange for dollars.
Your investment in gold is based on the price of gold. That is determined by supply and demand. While the demand is fairly constant, there are instances — like economic downturns and time of geopolitical distress — when the demand changes.
If investors start to become concerned about the economy, they buy up gold, thus increasing demand and pushing up the price. If the economy is good, that demand is lowered.
Here are the different drivers of gold price performance, according to the World Gold Council:
- Currencies — The strength and weakness of the U.S. dollar and other currencies.
- Economic growth and market uncertainty — Things like inflation, interest rates, income growth, consumer confidence and tail risks all factor into the price of gold at any given time.
- Tactical flows — The positioning of derivatives and price momentum can have an impact on the price of gold.
- Additional supply and demand dynamics — Looking at things like mine production and idiosyncratic demand-side shocks can apply pressure to the price of gold.
As a potential investor in gold, you also have to understand why it can be a valuable investment.
Gold has been a big portfolio diversifier for many years. It can protect portfolios against inflation and currency risk, as well as help mitigate losses in times of market volatility.
The gold market has been strong since 1970, steadily increasing in price-per-ounce. So even as a safe haven, gold has weathered market ups and downs over the years.
Now that you understand gold as an investment, let’s look at our three tips to investing in gold:
3 Tips to Investing in Gold
1. Know the Different Types of Gold Investments
One of the first things you need to know is there is more than just one way to invest in gold.
According to the World Gold Council, here are different ways to buy gold:
- Physical gold — Actual gold bars and coins have made up nearly two-thirds of annual investment gold demand. The demand for bars and coins has quadrupled since the early 2000s. That demand has spread across the globe into emerging markets like China.
- Gold-backed ETFs — Gold exchange-traded funds are about one-third of total investment gold demand. Some of the more popular gold-backed ETFs are SPDR Gold Shares ETF (NYSE: GLD) and Gold Trust iShares (NYSE: IAU), but there are several others to look at.
- Allocated gold account — The holder of an allocated gold account owns a specific quantity of gold with a bullion bank. There is also unallocated gold accounts where the owner has a general entitlement of gold.
- Internet Investment Gold — IIG is a way for a person to buy an amount of gold online and have it stored.
- Gold derivatives, futures and options — If you are a more seasoned investor, looking at gold derivatives or futures could be a way to invest. They are traded both over-the-counter and on exchanges, but they come with much higher risk.
- Gold mining stocks — Rather than invest in actual gold, you may decide to invest in companies that mine gold. While their stock price may have a tie to the actual price of gold, it is also dependent on future earnings, company growth and other things that factor into the stock price of a company.
So you see, there are a number of different ways to invest in gold. That’s why having an understanding of all those ways is one of our three tips to investing in gold.
2. Know if the Timing Is Right
Gold is known as a market safe haven. This means when there is market volatility — for any reason — gold is something viewed as being a safer investment at the time.
Investing in gold can also be used to hedge against inflation and preserve wealth for the future.
Since 1970, the price of gold has been on an upward trajectory — with the exception of a period between 2012 to 2015.
However, since 2015, the price of gold per ounce has steadily risen and, as of this writing, is close to $1,600 an ounce. The price was at its highest in August 2011 when it reached more than $1,800 an ounce.
But just because the price of gold is high now, that doesn’t mean it won’t go higher. It also could hold steady or drop — making returns slight. Make sure you do your homework to determine the right time for you to buy gold.
That’s why knowing if the timing is right is one of our three tips to investing in gold.
3. Know How Much to Invest in Gold
Just like with any other kind of investment, you have to understand the risks involved with investing in gold.
And just like investing in stocks, the price of gold can go up just as easily as it can go down. It can be a volatile asset so regardless of why you are investing in gold, you probably don’t want to sink your entire retirement into it.
It really all depends on what you are trying to get out of your portfolio. If you are just getting started, you likely want to keep no more than 10% of your overall stock portfolio in gold.
Besides being a safe haven against inflation, gold can also help diversify your portfolio but as the market changes, you want to make sure your portfolio is balanced.
Know your limit and understand the risk. That’s why knowing how much to invest is one of our three tips to investing in gold.
From understanding gold as an investment to the different types of gold investments, before you jump into buying it, you should understand these premises.
But at the end of the day, the investment decisions are yours to make. Remember, it’s your money and you decide what to do with it.
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