Is Owning Gold a Smart Investment?
If you've ever wondered if you should invest in precious metals, it's time to get more information. Laura answers a listener question about owning gold in light of the political climate. She'll explain why investors choose gold, how to buy it, and what amount might be right for your portfolio.
Money Girl Podcast listener named Tom C. says, “With all this talk of war with North Korea and similar things I’ve heard a lot about investing in gold. I’d be interested to hear your thoughts on investing in precious metals.”
If you do a Google search for the phrase “should I buy gold?” or ask different financial advisors that question, you’ll get a variety of answers. There are dissimilar schools of thought about whether owning gold or other precious metals is a good investment.
In this post, I’ll answer Tom’s question and recommend the best amounts and ways to buy gold if you decide to make it part of your investment portfolio.
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A Brief Overview of Gold
You probably know that gold has always been a powerful metal. Early civilizations around the world associated it with gods and immortality. It’s rarity, beauty, and durability mesmerized humans for thousands of years before we ever stamped it into coins and used it as a currency, which started around 700 B.C.
In the late 1800s, most major nations fixed the value of their currencies to gold, which is known as being on a gold standard. But in the 1900s most countries realized it wasn’t working. In the U.S., we took our currency off the gold standard in 1933, we adopted it again after World War II, and then abandoned it completely in 1971.
Most modern currencies are now fiat money, which means it isn’t backed by anything or linked to physical gold reserves. Even though there’s still a lot of gold held by central banks and governments in developed nations, it doesn’t match their supplies of money.
Should You Invest in Gold?
Over the long run, the price of gold has shown an inverse relationship to the U.S. dollar. When the value of the dollar goes up, the price of an ounce of gold goes down. And when the dollar decreases, gold goes up.
Gold tends to perform well when confidence in paper currency and the stock market goes down or there’s a fear of bad times ahead, such as a looming recession or war. For instance, during the 2008 recession, gold rose from about $1,000 per ounce to its all-time high, over $1,900, in September 2011.
Gold tends to perform well when confidence in paper currency and the stock market goes down or there’s a fear of bad times ahead, such as a looming recession or war.
Many argue that owning gold is like an insurance policy that allows you to hold value when the economy is struggling. However, be aware that its inverse relationship to the dollar doesn’t always hold true in the short term.
Even though people buy and sell gold every day, the buzz about investing in gold always gets louder when our economic situation could get rocky. Regardless of what’s going on politically, my answer to Tom’s question is that you should always own some amount of gold or other precious metals.
I’m a strong believer in having a diversified portfolio, and that includes some amount of gold. But the downside of owning gold or other precious metals is that they can be extremely volatile and risky. So, the trick is not to go overboard.
My recommendation is that you own gold in an amount up to 5% or 10% of your portfolio. For instance, if you have investments for retirement worth a total of $200,000, you might own a maximum of $20,000 in precious metals. The rest should be a diversified mix of stocks, bonds, cash, and perhaps real estate.
There are a variety of ways to invest in gold, but I’ll review two straightforward options that make sense for the average investor, each with pros and cons: bullion and gold funds.