Investing in gold? 4 things to know first

Are the recent market developments and inflation trends driving you to analyze your investment portfolio? In times like these, many consider investing in gold to reduce their exposure to risk. But is that a good idea? Or should you consider other investment options instead? Gold can be beneficial for a wide variety of people but, as with all investments, it helps to understand the nuances before getting started. In this article, we will break down the ins and outs of gold investing so you can determine if it's right for you.

If you're considering investing in gold then start by requesting a free information kit to learn more.

4 things to know before investing in gold

Investing in gold can be confusing. Here are four key things to know first. 

1. Gold can act as a hedge against inflation

There's a reason gold comes up in more conversations when inflation is high. 

Ohan Kayikchyan Ph.D., CFP explains that gold historically has an inverse relationship to the U.S. dollar, saying, "Gold prices tend to go up when the dollar is weak. As a result, many investors prefer to store their funds in gold, especially during stressful economic times."

He adds, "In recent volatile times for the stock market, gold once again has become a good alternative when it comes to keeping value and hedging against high inflation."

2. There are better times to invest than others

You may wonder about the best time to invest in gold. As it turns out, some times are better than others.

The price of gold fluctuates based on factors like supply and demand, interest rates, inflation, currency value, and geopolitical events. 

For example, the lowest price per Troy Ounce of gold in the past five years was $1,176 in August of 2018. The highest price was $2,067 in August of 2020. While gold had a relatively steady climb from 2018 to 2020, it's fluctuated since 2020 and has yet to return to that peak price. 

By watching the trends and buying when the price is lower, you stand to gain more than if you buy when the price is high. 

Explore your gold investment options online to see if now is a good time to get started.

3. There are multiple ways to invest in gold

Investing in gold can be more complex than many first assume. You can buy gold coins or gold bars, invest in exchange-funded ETFs, open a gold IRA and more. 

Gold coins and bars

If you opt for gold coins or bars, you'll have to consider factors like weight, portability and quality. "Gold coins are generally easier to sell and/or trade than gold bars due to their smaller size and recognized weight," says Dan Seder, CFA, CMT, CFP, and managing director at Blue Chip Partners.

He adds, "Before buying physical gold from a retailer, it's essential to consider the quality of the gold being sold, the reputation of the dealer, and any storage costs. Buying gold online can be convenient, but proper due diligence is necessary to ensure you're buying from a reputable dealer."

Gold ETFs, mutual funds and futures

You could also opt for exchange-traded funds (ETFs). "Some ETFs and mutual funds mimic the gold price movement and are considered a go-to option for many investors, but in many instances, they are taxed as collectibles. So there are no long-term capital-gain tax benefits that stocks possibly can get," explains Kayikchyan.

"Gold futures are also popular among precious metal investors, but it is more of a speculative approach to investing and not a long-term strategy. Many people invest in gold mining companies, just to have that diversification involving the precious metal," adds Kayikchyan.

Gold IRAs

Gold IRAs are specialized retirement accounts that allow you to hold physical gold and precious metals instead of paper assets. You can often opt for a traditional, Roth, or SEP account type and contribution and distribution limits will apply. 

4. Historical context can drive up the value 

Another interesting aspect of investing in gold is that historical context can increase its value. 

"Some coins are worth 100x, even 1000x, multiples of their metal melt value," explains Anton A. Bogdanov, appraiser and senior content editor at Everything But The House. "Numismatists (hobbyist coin collectors and researchers) assign value by year, mintmark, condition, scarcity, among a host of other factors. This isn't just true of coins, but bars, too." 

He adds, "Ingots bearing the marks of collectible assayers and refiners have been found to command substantial premiums in auction. So, investors in gold coins and bars can hedge their bets with items that hold a historical context."

To gain an advantage on this front, however, you'll need to do your homework and understand when you have a coin or bar with an increased value.  

You can learn more about the benefits of investing in gold by requesting a free information kit now!

Other considerations

While gold has several advantages, it also comes with a few potential drawbacks. 

Unproductive asset

Gold is an unproductive asset which means it doesn't generate income or dividends the way productive assets like stocks and bonds do. "The amount of gold that you put in your bank safe deposit box will stay the same, regardless of how much time passes," explains Kayikchyan. "It very rarely will beat the stocks when it comes to their performances."

Value volatility

The value of gold is also subject to sudden fluctuations. "Gold prices are affected by many factors and do not always have a positive tendency. At times, gold investors might lose money," says Kayikchyan. 

For example, in March of 2022, gold prices surged following Russia's invasion of Ukraine. However, in the months following, the Federal Reserve steadily increased interest rates and the hikes caused the dollar to reach its highest value in two decades. The result? Gold prices fell from $2,017 per Troy Ounce in March of 2022 to $1,631 in October of the same year. 

Storage and insurance costs

Physical gold also comes with the risk of physical loss or damage. Prevention requires an investment in secure storage and insurance. This can involve custodial and storage fees as well as insurance premiums. 

"Insurance is important when buying gold because it can protect your investment in the event of loss or damage. However, investors should consider the cost of insurance and how it will affect their overall investment," says Seder. 

Should you invest in gold?

As with most types of investments, gold offers advantages and drawbacks. It can help to diversify your portfolio and hedge against inflation, but is also vulnerable to sudden fluctuations and doesn't offer the growth potential of productive assets like stocks. "The rule of thumb is to allocate to gold a maximum of 10% of your overall portfolio," says Kayikchyan. 

However, you'll have to weigh the pros and cons to decide what's right for you. "Before committing to any large purchase, talk with your fiduciary, financial advisor, or legal counsel. These decisions should not be made in a vacuum," advises Bogdanov. 

Learn more about your gold investing options by requesting a free information kit from Goldco today.