Should Gold Prices Impact Your Investment Strategy?

Gold can be a strategic part of a diversified investment portfolio, but investing in gold isn’t for everybody. If you’re considering buying gold, it’s important to do your research first to make a fully informed decision. Here’s what you need to consider.

The Cost of Gold

To determine whether an investment in gold is appropriate for your portfolio, you’ll want to first consider the current price of gold, which fluctuates daily. The average cost per troy ounce of gold in August 2016 was $1,337.96, according to Investing.com. During the same time period in 2015, the average cost was $1,118.73 — not a bad jump.

For how well gold has fared in the last 12 months, however, the commodity has seen its lows, too. Here’s a look at the average price of gold, per troy ounce, in the last decade, according to data from Statista.com.

YearPrice of Gold per Troy Ounce
2015$1,160.06
2014$1,266.40
2013$1,411.23
2012$1,668.98
2011$1,571.52
2010$1,224.53
2009$972.35
2008$871.96
2007$695.39
2006$603.46

Related: How You Can Capitalize on Current Silver Prices

Should You Buy Gold? What Experts Say

Although it’s clear the price of gold went up significantly over the last 10 years, the experts are divided when it comes to gold as a long-term investment strategy.

How Gold Hedges Against Economic Downturns

David Waring, co-founder of Fit Small Business and previous top executive at Forex Capital Markets LLC, said for some investors, gold is an insurance policy against an economic downturn.

“There may only be a 5 percent chance that the economy and monetary system implodes, but by buying gold, you’re insuring that 5 percent,” he said. “If you have a bar of gold and throw it in a closet, it will be worth a fair amount more than storing $100 in your closet for 50 years.”

Although gold and precious metals can be hard to trade and difficult to predict in terms of price, Damon Gonzalez, certified financial planner at Domestique Capital LLC, said any rational investor should realize that the possibility of the markets turning against government bonds and the U.S. dollar is real, even if that chance is small.

Gonzalez recommended investors keep a percentage of their portfolio in gold coins and maintain that percentage over the years. If that piece of your portfolio doesn’t make you a whole lot of money, it might mean your other investments are faring better.

“Someone once said that you should put 10 percent of your money in gold and hope it is the worst investment you ever make,” Gonzalez said.

Why Average Investors Should Avoid Gold Investing

On the other hand, co-author of the book “Invest With the Fed” and president and CEO of the American College of Financial Services, Robert R. Johnson, said gold is a poor investment choice for the average investor.

“Gold is a speculative investment and has little underlying fundamental value because it does not generate any future cash flows other than the prospect of potential price appreciation,” he said. “In other words, investing in gold relies on the greater fool theory — that is, that the price isn’t determined by any intrinsic value but is determined by the irrational beliefs and expectations of other market participants.”

In a February 2012 issue of Fortune, billionaire CEO of Berkshire Hathaway, Warren Buffett, gave an analogy on the value of investing in companies over gold. He described two “piles.” Pile A is comprised of $9.6 trillion in gold. Pile B is made up of all of the U.S. cropland, 16 ExxonMobils and about $1 trillion in cash. “Can you imagine an investor with $9.6 trillion selecting pile A over pile B?” he asked.

Zack Shepard, vice president of the investment firm Matson Money, agrees that gold is not the wisest investment. He often tells clients that gold is great for jewelry, but terrible for an investment portfolio.

“Since 1926, gold’s annualized return was about 4.38 percent, with a standard deviation (risk measure) of about 20,” he said. “In that same time period, all U.S. stocks have had an annualized return of about 9.77 percent, also with a standard deviation (risk measure) of about 20.”

How to Buy and Sell Gold

Once you’ve made a decision about whether investing in gold is a good choice within your personal investment strategy, you’ll need to find a reputable seller to buy from.

The first step is to look into a seller’s industry accreditation and its reviews with the Better Business Bureau. During your search for a reputable seller, you might run into sellers charging fees, according to Joseph Yaffe of Gainesville Coins, an online source for precious metals.

“It’s true that some dealers charge a fee just to conduct business with them, like a stock broker,” Yaffe said. “This, however, is not an industry standard and is frankly unnecessary.”

“Another consideration concerning fees are taxes: Some states charge no sales tax at all on precious metal purchases, while others only do so above a certain threshold (usually purchases exceeding $500 or $1,000),” he added.

Also See: 10 Investments That Shine Brighter Than Gold

Investors should consider annual fees if they deposit their gold. Since you’ll likely hold onto your gold for many years, such costs can burden your returns. Additionally, if you want to sell your gold, Yaffe said to avoid these common pitfalls:

  1. Avoid eBay, where you’ll assume all risk and pay high fees.
  2. Don’t sell to cash-for-gold operations unless all you have is scrap and jewelry.
  3. Avoid trading at flea markets and gun shows unless you know the value of what you’re getting in return.

The Bottom Line

Investing in gold as a small portion of your portfolio can be a wise choice for some investors to hedge against a potential economic downturn. If you do buy gold bars and gold coins, do so with a long-term approach in mind.

Follow the price of gold as it fluctuates over time too, and work with professionals to determine when, and if, you should sell. Keep in mind that investing in gold isn’t for the faint of heart. It’s a speculative investment that, historically, hasn’t kept up with stocks in terms of value.