Since 2020, the purchasing power of the US dollar has depreciated by over 20%. This is widely believed to be a result of generous large-scale monetary and fiscal stimulus policies, injecting billions of dollars into the market through stimulating funds, forgivable loans, debt relief, and other benefits provided in the form of the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act) passed to combat the pandemic.
Investing in gold can provide diversification to your portfolio by balancing high-volatility assets like stocks, thus reducing risks. Gold prices do not have a close correlation with stock and bond prices, leading many financial advisors to recommend allocating a small portion of your portfolio to gold, typically around 5% to 10%.
Hedge against inflation:
Gold tends to hold its value during inflationary periods, making it an effective tool to counter rising prices. While gold serves as a long-term hedge against inflation, its short-term performance may be less stable. Due to its long-term value-preserving nature, precious metals like gold and silver are often used as inflation hedging instruments. However, when using gold as an inflation hedge, consideration should be given to the holding period and individual investment objectives.
Safe-haven asset:
During economic recessions or geopolitical instability, many investors and financial experts consider gold a safe-haven asset. A safe-haven asset is an investment expected to retain or increase in value during market turbulence or economic uncertainties. Gold has served as a means of value storage for thousands of years and is widely recognized globally. Unlike fiat currencies, gold does not depreciate due to excessive printing. Fiat currencies lack physical asset backing and are only used in specific countries.
Limited supply:
The limited supply of gold helps maintain its long-term value. Gold is a finite natural resource, and there may come a time when new gold supplies in the world approach depletion. Compared to fiat currencies, the supply of gold is relatively limited. The latest World Gold Council report shows a 4% decrease in the total global gold supply. Mined gold production also declined by 4%, reaching 3,401 tons, with only 896 tons produced in the latest quarter, marking a five-year quarterly low.
Historical performance:
Gold has a centuries-long history as a store of value, providing a sense of security and stability. While gold may not perform as well as stocks and other investments, it serves to offset currency inflation at the very least.
No income generation:
Unlike stocks or bonds, gold does not generate dividends or interest. Although gold is typically seen as a wealth preservation tool, its price can still fluctuate, especially in the short term. New investors should understand that gold is not an income-generating asset. It does not produce dividends or interest, meaning one must rely on price appreciation for returns.
Price volatility:
Gold prices can fluctuate significantly due to various factors such as market sentiment and geopolitical events. While gold has proven its ability to retain value over the long term, short-term fluctuations are common. Numerous factors can impact the price of gold.
Storage and insurance costs:
Physical gold requires secure storage and insurance, which can add to investment costs. The storage costs of gold may incur additional expenses but are usually justified. Investors aim to protect their investments from theft and natural disasters through secure storage options like bank vaults, home safes, or secure storage facilities.
Liquidity concerns:
Although gold is generally considered a liquid asset, selling physical gold may not always be straightforward compared to other assets. Gold is not a liquid in a physical sense, being a metal with a melting point of 1,064 degrees Celsius. Nonetheless, from a financial perspective, gold is seen as a highly liquid investment as it is easily bought and sold.
Counterfeit risks:
When purchasing gold, especially from unknown sources, there is a risk of buying counterfeit products. Investing in fake gold items can lead to serious consequences, resulting in substantial economic losses for unwary individuals. Scammers often use elaborate tactics to create the illusion of legitimate investment opportunities, such as providing forged documents, promising unrealistic returns, and employing persuasive sales techniques.
There are various ways to invest in gold, with each option having its advantages and considerations. Some common choices include:
– Gold bars: This includes gold bars and coins, serving as physical assets that can be stored personally or in secure locations.
– Jewelry: While not the most cost-effective investment due to high markups and craftsmanship costs, it offers a means of holding gold.
– Investing in mining or gold production companies: This investment is subject to higher volatility, depending on company performance and gold prices.
– Exchange-traded funds (ETFs): These funds track the price of gold and can be traded like stocks, offering a convenient way to invest in gold without the need to store physical metal.
– Futures contracts: These entail buying and selling gold at a predetermined price on a future date. They can be more complex and usually handled by experienced investors.
– Gold certificates: Issued by banks, these represent ownership of a certain quantity of gold, providing an investment avenue without physically holding gold.
– Digital platforms: Some platforms allow you to purchase and hold gold digitally, offering a convenient and cost-effective way to invest in gold.
Gold is classified as an alternative asset – meaning it is a type of investment different from stocks, bonds, or cash. Alternative assets also include other commodities like silver, collectibles, artwork, wine, and even coin collections, all of which are broadly considered part of an investment portfolio.
Patrick Dinan, the CEO of Fiduciary Company, stated, “A small amount of gold can help diversify the risk in an investment portfolio.” The company offers trust and financial management services. Dinan mentioned that gold typically accounts for an average of around 2% in clients’ investment portfolios as it is considered an unrelated alternative asset.
Given the potential continued decline of the US dollar, investing in gold may be a wise choice.
Remember, not everything that glitters is gold.