When you should invest in gold - and when you shouldn't
Gold prices ticked up to $2,044 per ounce on May 4, inching closer to the record high of $2,067 on August 6, 2020, according to the World Gold Council. Gold prices have hovered near the $2,000 mark for several weeks as the debt ceiling stalemate continues, and fear of an economic recession is pushing some Americans towards the safe-haven metal. Many analysts are now predicting the price of gold to eclipse its peak price.
Gold's performance shouldn't be surprising, as the precious metal has long been seen as a storage of value in uncertain times and a hedge against inflation. It may be an excellent time to add a slice of gold to your holdings since, historically, the metal has helped investors protect their portfolios against an unstable economy and global turmoil.
While previous performance does not guarantee future results, we can look at past trends to better understand when you should—and shouldn't—invest in gold.
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When you should invest in gold
While timing the market is typically a futile exercise, there are some times when you're better positioned for success, such as:
- During periods of significant inflation: Because gold tends to hold its value longer than asset types, it can be attractive to investors as a hedge against inflation. For example, the 1970s began with an average interest rate of 5.84% and spiked to 13.58% by 1980. According to Nasdaq, gold prices increased dramatically during that period, rising from $35 to $850 per share.
- In times of economic uncertainty: Gold is often viewed as a "safe haven" investment during economic downturns or global uncertainty. Gold prices often increase as investors move to safety. "Gold can hedge stocks during major calamity events, like in 2008 and during Covid gold performed well as a hedge relative to stocks," said Philip Palumbo, CEO and chief investment officer of Palumbo Wealth Management.
- When interest rates are low: Gold has an inverse relationship with interest rates, meaning when interest rates are low, gold prices may rise, and vice-versa. That's because many investors turn to treasury bonds and other interest-bearing yields when interest rates are high. Conversely, if the Fed begins to cut interest rates, it could be bullish for the precious metal, as investors wouldn't feel like they're missing out on higher yields elsewhere.
- When you need to diversify your portfolio: Gold has an inverse correlation with other asset classes and tends to outperform when the stock market stumbles, and vice-versa. If your portfolio is unbalanced and heavily concentrated in one asset class, such as stocks and bonds, adding some gold shine can help you spread out risk.
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When you shouldn't invest in gold
While gold can benefit you in certain situations, there are also times when gold may not be your best option, including:
- During strong economic times: Gold generally performs better during economic duress than in times of stability or growth. As such, you may earn greater returns by investing in stocks and other investments that outperform precious metals. According to May 2023 data from Macrotrends, the Dow Jones Industrial Average (DJIA) has delivered a return of 844% over the last 30 years, while gold has returned 447% over the same period.
- When you're older: While gold can diversify your portfolio, the risks may not be ideal for retirees and those living on a fixed income. Remember, gold can experience wide fluctuations during short periods. If you're younger, you're in a better position to regain losses over the long term.
- When you need income: Unfortunately, gold doesn't produce dividends. If you need income for living expenses or to reinvest for growth, you may benefit more from dividend-paying stocks, municipal bonds or real estate investments.
The bottom line
Gold, silver and other precious metals can be a safe haven during economic uncertainty, but they're not your only option. Treasury bonds are issued by the government and, consequently, provide a measure of safety. Dividend stocks also can be a wise investment, especially those with a consistent record of issuing dividends even when the stock price falls.
No matter which asset you choose, it's always wise to consult your financial advisor or tax accountant beforehand to ensure the investment aligns with your long-term goals. Many financial advisors recommend investing no more than 10% of your savings in gold to diversify your portfolio.
