Pros and Cons of Investing in Gold: Is It Right for You?

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Gold prices soared to a record high above $3,000 in March as investors sought comfort in precious metals amid a stock market downturn, trade tensions, inflation fears and talk of a looming recession.

The moment was part of a long historical trend — economic anxiety and gold grabs have always gone hand in hand.

Gold can provide security and stability in uncertain times, but it’s not free of risks and limitations. If you’re considering investing in history’s most famous metal, consider the benefits and drawbacks first.

Pros of Investing in Gold

• Stability and safety: Gold has an inverse relationship with currency — its value appreciates when the dollar weakens. It’s also a historically reliable store of value and a hedge against inflation.
• Portfolio diversification: Gold, which experiences lower long-term volatility than stocks and isn’t tied to market performance, can balance an overly risky portfolio
• Tangible asset: Physical gold is a universally recognized asset of intrinsic value that you can hold in your hand and store in your safe.
• High liquidity: Investors have several ways to quickly and easily convert gold to cash.

Cons of Investing in Gold

• No interest or dividends: Gold doesn’t pay a yield or generate income in the form of compound interest like savings deposits or shareholder payouts like many stocks. 
• Price volatility: Since gold is subject to market fluctuations and changing economic conditions, its price can and does change — sometimes dramatically.
• Storage and security costs: Gold is vulnerable to theft, floods, fires and loss. If you own it in its physical form, security is an immediate and potentially costly consideration. If you invest in it in other forms, the cost of security is built into the price. 
• Potential for limited growth: Investments like stocks have more room for capital appreciation. 

How to Invest in Gold

There are three primary ways to invest in gold.

Physical Gold

Just about anyone can purchase physical gold bars or coins — known as bullion — online or in person from their local precious metal dealer or coin shop. There is a debate over the logic of gold jewelry as an investment, but jewelry is typically alloyed with other metals and abstract factors like craftsmanship affect its value.

Gold Stocks

If physical gold is too hands-on, gold stocks issued by publicly traded mining companies — or the streaming companies that finance them — can provide many of the same benefits without the need for storing and securing heavy hunks of metal in your home.

Examples of gold stocks:

• Alamos Gold (AGI)
• Wheaton Precious Metals (WPM)
• Kinross Gold Corp (KGC)

Gold ETFs and Mutual Funds

For greater diversification and a hedge against risk, gold ETFs and mutual funds offer exposure to dozens of gold stocks with a single investment. 

Examples of gold funds: 

• iShares MSCI Global Gold Miners ETF (RING)
• SPDR Gold Shares (GLD)
• iShares Gold Trust (IAU)

When Should You Invest in Gold?

Only you and your financial advisor can decide if gold is right for you and, if so, when is the right time to buy. However, investors typically flock to gold as a safe-haven investment during times of high inflation, economic uncertainty and geopolitical unrest.

However, attempting to time the gold market is generally as futile as trying to time the stock market. As the saying goes, it’s not timing the market. It’s time in the market. With gold, as with stocks, long-term buy-and-hold strategies are often the surest bet. 

Over the last 10 years, the price of gold has risen by around 157%, fast on the heels of the S&P 500’s 189% growth in the same period.

Key Factors That Affect Gold Prices

A wide, varied and often unpredictable range of factors can impact gold prices, including, but not limited to: 

• Supply from mining production and investor demand.
• Fluctuating interest rates and currency valuations — both yields and the dollar tend to have an inverse relationship with gold.
• Inflation — when prices rise, worried investors flock to gold
• Geopolitical events — conflict, tension and political instability drive up demand for gold and, therefore, prices.
• Central bank policies.

Gold’s millennia-long history as a currency, utilitarian metal and coveted thing of beauty gives it staying power that is virtually unrivaled in the investing world. It’s a physical, tangible asset with a long history as a reliable store of value and inflation hedge, which makes it a go-to safe haven investment in times of turmoil or uncertainty. 

However, it’s not a miracle metal. Its price can be volatile, and those who own it must take steps to store and secure it. It also lacks the interest yields, dividend payments, and growth potential of other financial vehicles. 

Gold can be an excellent addition to a balanced portfolio, but only as part of a well-planned strategy that matches your time horizon, risk tolerance and investment objectives.

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