If you’ve ever wondered why gold has always remained a top choice for people to hold in times of uncertainty, it’s because of its capacity to hold value. In our modern world, people can buy gold in several forms, such as gold stocks, physical bars or coins, exchange-traded funds (ETFs), or mutual funds to diversify their portfolios.
However, you may wonder if buying physical gold is suitable for asset diversification. Before making such a choice, you must know gold investment strategies. Below, we detail how you can fit gold into your goals and investment strategy for asset diversification.
Advantages of Gold Investment
Gold has remained an option for investment for several reasons, which include protection of a portfolio against market volatility and hedging against inflation. Some of its benefits include:
Gold As a Safe Haven Investment and Hedge Against Inflation
Throughout history, many individuals have sought out gold as a haven compared to other assets like real estate and stocks. This results from gold maintaining its liquidity and value even during economic downturns.
Additionally, during high inflation, investors take gold as protection against the increasing cost of services and goods and higher rates. Though gold can hold its value over time, other methods, such as Treasury Inflation-Protected Securities (TIPS), can serve as a protection from inflation effects.
Helps Diversify Portfolio
Adding gold and other precious metals such as silver, palladium, and platinum is a good option when discussing asset diversification. You can consider gold as a hedge against volatility since it doesn’t move in collaboration with the stock market. When occurrences like pandemics and war affect the market, gold’s price may rise.
An expert take by Oxford Gold Group states that not only does gold diversify a portfolio, but it also aids in preserving wealth, particularly in the long term. During volatile economic situations, gold might gain value during investors’ panic when they pull their money out of the stock market. The result is an increasing demand for gold.
Disadvantages of Gold Investment
Though gold holds immense investment benefits, there are certain disadvantages to it. This is why financial advisors usually advise investors to keep only about 5% to 10% of their portfolio in precious metals. Some of the disadvantages of having an investment in old include:
Inability to Generate Income
Compared with bonds and stocks, a considerable disadvantage of gold investment is its inability to generate income. Investors might not earn dividends like in stocks and won’t get yields when holding a bond at maturity. Additionally, gold doesn’t increase in value. This is why you must consider the time zone and ensure you can wait till the price drops.
Gold is Volatile
Since gold is quite volatile due to its nature, investors should consider it a long-term investment. Individuals interested in creating their investment portfolio for retirement but can’t wait for a price drop might run the risk of gold’s price falling and not regaining its value when they need to sell.
How to Invest in Gold
Before deciding to invest in gold, you must have consulted with a financial advisor and performed your research. You can choose from several investment options, and each has its complexity degree and expenses. Ensure you consider your risk tolerance and expertise before starting.
This is the most typical way to invest in gold. However, there are several things you must consider if you choose this gold form. They are the dealer markups and storage expenses. You can choose to hold gold, rounds, bars, ingots, or coins. When buying physical gold, you should choose a reputable private or government mint.
For investment-grade gold bars, the international standard of purity stands at 99.5%. White gold coins are usually anywhere from 22-karat to 24-karat pure gold. When considering the physical storage of physical gold, ensure you choose a safe or safe deposit box
As commodity funds similar to stocks, they are a popular type of investment for investors. It allows investors access to gold without the need to own the physical gold. Investors can buy gold ETF shares through brokerage accounts. You can choose from the myriad of online brokerage platforms for ETF investment. However, you must know how investing in an ETF works before getting started.
Gold Mutual Funds
Another way to invest in gold is by obtaining gold mutual funds. Investors can buy mutual funds containing stock companies producing gold or financing production. For investors, gold mutual funds offer investors the choice of asset diversification without holding physical gold. Gold Mutual operates similarly to other kinds of mutual funds you may already have in your portfolio.
Gold Mining Stocks
Investors can also purchase the stock of companies mining and producing gold. However, every investor must be aware that holding a single company’s stock poses a higher risk than a fund with several gold companies.
Should I Buy Gold?
Like every other investment option and decision, investing in precious metals such as gold lies in several factors, including your goals, risk tolerance, and timelines. While a gold investment presents benefits such as its value and haven status when there is market volatility, this might not be best for every investor.
Investors must be aware that gold’s price fluctuates; therefore, it could lose its value quickly and isn’t a short-term investment, providing no interest or dividends. Finally, gold is usually considered an alternative investment like cryptocurrency; it should not hold more than 10% of your portfolio.
Gold offers investors a lasting investment option with numerous benefits. Some of its appeal include its durability as a hedge against inflation and a haven and its ability to diversify portfolios. However, despite such requests, gold’s inability to generate income and volatility might be a drawback for some investors. This ensures investors have proper considerations before choosing to invest in gold. Investors must consider time, risk tolerance, and goals in every investment decision. As an investor, you must take time to discuss your plans with an experienced financial advisor.