Gold investing dos and don'ts, according to experts

Despite encouraging signs, the state of the economy remains uncertain. Most recently, after pausing interest rate hikes in June, the Federal Reserve appears poised to raise the benchmark rate again in an effort to continue cooling inflation. 

Given the current economic environment, many Americans are reconsidering their investment portfolios. And some are turning to gold.

Gold, historically, is an investment many investors consider through economic slumps or periods of global unrest. The precious metal is often seen as a store of value that can act as a safe haven for your money. If you're new to gold investing, it's essential to understand the best practices to employ and the biggest mistakes to avoid before you buy.

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What you should do when investing in gold

Here's a breakdown of gold investing tips from experts to consider when you add gold to your investment portfolio.

Do consider gold investing during periods of uncertainty

In times of high inflation or geopolitical turmoil, gold prices often increase as investors move to safety. The 1970s is a prime historical example. The average interest rate in 1970 was 5.84% before soaring to 13.58% by 1980. Simultaneously, gold prices experienced a whopping increase from $35 per ounce to near $700 per ounce in the same period, according to historical price data.

"It (gold) is the only asset which has no counterpart risk," says Howard Crosby, founder and executive director of Gold Express Mines. "This is why, in a world drowning in debt, major central banks purchased record amounts of gold last year." So when should you consider buying gold? "Now, or any other time you are the least bit concerned about the world economic situation or the solvency of governments," says Crosby.

Do diversify your portfolio

Investing in gold can help you diversify your portfolio in several ways, so a good way to use it is for this purpose. For example, gold is often viewed as a hedge against inflation, since it tends to maintain its value when the U.S. dollar declines. Additionally, gold often exhibits a low or even negative correlation with stocks and bonds. When these equities decline, gold can potentially offset these losses and stabilize your portfolio.

But using gold for diversification also means allocating only a small amount — so you can still benefit from your other assets. Experts typically recommend no more than 5% to 10% of your portfolio in alternatives like gold. That way, you can benefit from the stability during uncertainty, while growing your investments otherwise.

Do consider buying the dip

If you're simply looking for a portfolio diversifier to reduce risk, a long-term approach to gold investing may make sense. In fact, gold can benefit you over the long term through different ups and downs in the economy. However, taking advantage of trading opportunities and using gold as a trading market when prices are lower can be worthwhile.

"With this in mind, looking for large dips is generally a better strategy than buying into strength," says Carley Garner, strategist at DeCarley Trading.

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Do consider gold ETFs

When many people think of gold, they imagine physical gold bars you can hold in your hand. While investing in gold bullion is an option and can provide many benefits, don't forget about other forms of gold, such as gold IRAs and futures. The experts we spoke with pointed to gold exchange-traded funds (ETFs) in particular as an investment worth considering.

"Whenever gold has had a good year, you start to see ads on daytime TV to call and buy gold," says Michael Wagner, co-founder of Omnia Family Wealth. "But a lot of the fees, including shipping and insurance costs, can really add up. I would urge people to think about the expenses of buying physical versus looking into an ETF. If you're buying gold or silver as a portfolio diversifier, I think it probably makes sense to do it in the financial markets using an ETF."

Rohan Reddy, the director of research at Global X adds, "ETFs can be viewed as a convenient option for investors, namely because they don't have to worry about storage or additional costs that come along with purchasing physical gold."

What you shouldn't do when investing in gold

As with any investment decision, always pay attention to common investor mistakes you should avoid, including the following:

Don't overlook gold's role in your portfolio

"Gold investors should avoid the mistake of thinking about gold in isolation instead of as part of a portfolio," says Robert Michaud, president and CEO of New Frontier Advisors. "Gold's greatest value is its ability to hedge risks that stocks and bonds are exposed to."

In other words, focus on gold's role as a store of value in your portfolio, not on the short-term price fluctuations. Remember, short-term price changes can be unpredictable, making it challenging to make investment decisions. Ultimately, holding on to gold can help stabilize your investment mix amid the ups and downs of other investment classes.

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Don't overlook due diligence

Just like equities or other investment classes, gold investing comes with unique features you should understand before deciding to invest. As such, it's worthwhile to research the gold market and understand its benefits and downsides.

"The biggest mistake most new gold investors make is not taking enough time to get an understanding of the gold market, and either allocate too little to gold or consider it as a speculative asset — only holding it for a short period of time," says Joe Cavatoni, chief market strategist, Americas, at the World Gold Council. He adds: "What investors need to understand is that gold has very favorable characteristics that provide positive long-term returns and it should feature as a material allocation to any diversified portfolio."

Before you invest, consider speaking with an expert, like a trusted financial advisor, who can help guide you through how gold may fit within your larger financial plan.

Don't ignore gold investment types

Remember, there are several ways to invest in gold, such as:

• Physical gold: You can buy gold bullion in bar and coin form.
• Gold IRAs: Gold IRAs are long-term retirement plans that allow you to hold gold or other precious metals to diversify your retirement savings.
• Gold futures: A gold future is a contract to buy a certain amount of gold at a set price on a specific date. Savvy investors can earn high returns by buying low, but there is also the potential for big losses. As such, gold futures are generally recommended for experienced investors.
• Gold ETFs: Gold ETFs are a collection of gold-back assets you can buy and sell through a brokerage, just as you would with individual company shares.

"Investors can limit themselves when they don't consider the breadth of options available to them," Reddy says. "There are various investment vehicles available to get exposure to gold, all of which should be considered before making a decision."

The bottom line

Given our current inflationary environment and economic unpredictability, adding a slice of gold to your portfolio could prove to be beneficial. The precious metal has largely held its value this year and its price even approached record highs in May. If you're looking to hedge against inflation or stabilize your portfolio, gold investing may be an alternative worth your consideration — after you research the best investment strategy for your individual goals. 

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