Negosentro | Is Gold a Good Investment? | Gold has long been treated as a store of value and safe haven asset. During times of market turbulence and economic uncertainty, investors frequently turn to gold as a potential shelter from volatility and inflation. But is buying gold actually a good investment in today’s environment? There are several factors to consider when evaluating the merits of gold for your portfolio:
Gold as a Historical Store of Value
The fundamental case for owning gold begins with its history as an accepted store of value dating back thousands of years. Investors generally don’t question gold’s worth or liquidity compared to fiat currencies, which rely on government stability. Gold is durable, divisible, portable, and universally recognized as valuable across the globe. With central banks continuing to amass a gold reserve, the basic case for holding some gold remains sound.
Current Market Drivers of Gold Prices
Gold’s investment case is also supported by several current market conditions. Concerns over prolonged high inflation and geopolitical tensions related to the Russia-Ukraine war underpin investors’ demand for gold’s safe haven qualities today. Low to negative real bond yields also make the non-yielding metal more attractive. Meanwhile, physical demand for gold jewelry and coins in Asia acts as a price stabilizer. These factors help explain gold’s rise to near-all-time highs.
The Weakness of the U.S. Dollar
Although the U.S. dollar is one of the most important currencies in the world, when the dollar’s value falls, people tend to flock to the security of gold, which, in turn, raises gold prices. The price of gold almost tripled between 1998 and 2008, when the U.S. dollar had dropped in value. If the value of the U.S. dollar drops significantly again, it will be worth investing in gold.
Risks and Limitations of Gold Investing
However, there are risks and limitations to be aware of with gold investing. Unlike bonds, gold does not offer any yield. And, unlike stocks, gold does not benefit from compounded growth over time. There are also costs associated with buying, selling, storing, and insuring physical golf. Without dividends or buybacks, gold investors must rely entirely on price appreciation. And historically, golf’s long-term returns have underperformed stocks, bonds, and real estate.
Alternatives to Direct Gold Ownership
Moreover, equity investors today have several ways to gain exposure to gold beyond direct physical purchases. Gold mining stocks can provide leverage to gold prices while also paying dividends. Gold ETFs offer efficient exposure to gold spot prices without needing to store bars and coins. Gold futures allow speculators to benefit from gold’s volatility. These alternatives potentially enhance or reduce certain aspects of direct gold ownership to align with an investor’s objectives and risk tolerance.
As you can see from the article above, gold can play a valuable role in providing diversification and downside risk management in the portfolio. But expectations for return and volatility must be set appropriately – gold should be viewed as a tactile asset rather than a long-term standalone investment. For most investors, a modest 10% allocation to physical gold, gold miners, or ETFs can provide an attractive offset to equities and inflation vulnerability. But, chasing gold higher, solely based on emotion or market downturns, rarely ends profitably.