Have you ever wondered if gold can truly secure your financial future? If so, it’s time to explore a balanced view of gold investment advantages and disadvantages. Having this information can answer most of the questions you have about investing in gold and if it’s the right fit for you.
Recently, we’ve been seeing signs of economic trouble, from rising inflation and market volatility to growing concerns about the stability of traditional financial systems. Many investors turn to gold since it has a long-standing history as a store of value. But is gold the safe haven people say it is?
Read on to learn all the details about owning gold.
Understanding gold investment
How did gold become an investment?
Gold history
People who consider investing in gold usually look at allocating a portion of their financial portfolio to this precious metal. When you invest in physical gold, you’re buying an asset that exists outside the modern financial system.
Since gold doesn’t behave like stocks, bonds, or real estate, you’ll find that it doesn’t:
Need lengthy paperwork to own.
Depend on any company’s performance.
Require a digital system to verify its value.
People have used gold as a store of wealth for much of human history, with traces of the first gold coins dating around 560 BC. By 1819, the United States adopted a “gold standard,” meaning that the government-linked the value of its currency to a fixed quantity of gold.
Many countries followed suit, and by 1900, the world had a stable financial system. This era of gold-backed money lasted until 1933 when the U.S. restricted private gold ownership.
The 1944 Bretton Woods agreement tied global currencies to a U.S. dollar still backed by gold at $35 per ounce. When this system ended in 1971 the government legalized gold ownership again in 1974, and prices soared to $850 by 1980 and beyond $2,600 in recent years.
Gold in the modern economy
Throughout history, there have been specific times when there’s been renewed interest in physical gold. The 2008 financial crisis, commonly known as the “Great Recession,” is a perfect example. More recently, the collapse of a series of major banks marked the 2023 banking crisis and reminded investors that digital wealth can be surprisingly vulnerable.
As a result, central banks added record amounts of gold to their reserves – over 1,000 tons in 2023 alone. Today, global central banks and multilateral financial institutions hold almost one-fifth of the world’s supply of above-ground gold.
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Benefits of gold investment
Below are the reasons why investors own physical gold.
Safe haven asset
Physical gold has a history of performing well in periods of economic uncertainty and market volatility. We’ve had eight recessions since 1973, and gold has outperformed the S&P 500 by an average of 37% on six of them.
During the 2008 financial crisis, as the S&P 500 fell by nearly 37%, gold prices rose by 2.6%. Also, when Silicon Valley Bank collapsed in March 2023, gold soared to over $2,000 per ounce while bank stocks plummeted. These aren’t isolated incidents.
Here’s how gold has repeatedly demonstrated its safe-haven status:
During the 2011 U.S. debt ceiling crisis, gold hit what was then an all-time high.
In 2020, as pandemic fears peaked, gold reached new records while other assets crashed.
The 2022 geopolitical tensions drove investors to gold as a refuge from uncertainty.
Gold reached another record high of $2,657 per ounce on 25th September 2024 amid concerns about the economy.
What makes gold unique is that it doesn’t rely on any company’s success or the government’s promise. This independence makes it a safe haven during times when investors may question traditional “safe” assets.
Gold as an inflation hedge and security from currency devaluation
Paper currencies lose their value because of inflation. Since 1971, when the gold standard ended, the U.S. dollar has lost over 85% of its purchasing power. Meanwhile, gold has risen from $35 per ounce to over $2,600. That’s why people see gold as a tool for preserving wealth against these kinds of declines in purchasing power.
Gold as a diversifying investment
Generally, investments help grow wealth compared to savings accounts, which often fail to keep pace with inflation. But, recent economic downturns show that a traditional investment portfolio of stocks and bonds doesn’t always provide adequate protection.
Gold has shown a near-zero correlation with stocks and a slight negative correlation with bonds over the past 50 years. This makes it an ideal asset class for offsetting portfolio losses without sacrificing long-term returns.
Independence from the digital financial system
Gold exists outside the electronic financial grid, which is different from digital assets or bank deposits. It’s not dependent on any institution or government. This independence reduces the risk of default, bankruptcy, cyber-attacks, or digital system outages.
Tangible asset
Gold’s tangibility brings distinct advantages:
Zero cybersecurity risk as it can’t be hacked or erased.
No counterparty risk because your wealth isn’t dependent on any financial institution.
True ownership since it is yours to control.
Also, the unique value of gold as a tangible asset is reliable over time due to its scarcity. While governments can print money and companies can issue more stock, nobody can create more physical gold.
Potential for capital appreciation
Most people choose gold for protection, not wealth building. But, history shows it can appreciate in value over time. From 2000 to 2020, gold outperformed the S&P 500, rising over 500% compared to the stock market’s 145% gain.
Here’s an overview of gold’s price appreciation trend in shorter periods:
1971 to 1980: Gold rose from $35 to $850 per ounce
2000 to 2011: The price climbed from $288 to $1,895
2018 to 2024: Gold moved from $1,200 to over $2,500
While past performance doesn’t guarantee future results, the trend highlights gold’s potential to preserve and grow wealth.
Global acceptance and liquidity
Gold is recognized and valued worldwide. It’s also liquid, which means you can convert it to local currency almost anywhere in the world. This acceptability is important as geopolitical tensions rise and some countries move away from U.S. dollar dependence. We discuss this on our podcast and the de-dollarization of U.S. currency:
Generational wealth transfer
If you want to transfer wealth across generations, gold offers a unique advantage. You can easily pass it to your heirs, and its value remains independent of complex inheritance systems or digital infrastructures.
Risks and considerations of gold investments
Like any other asset class in your investment portfolio, gold has potential drawbacks. Being aware of them will help you evaluate whether gold aligns with your investment strategy and overall financial goals.
No passive income
Physical gold doesn’t generate regular income like dividend-paying stocks or interest bonds. Instead, your returns depend solely on potential price appreciation when you decide to sell. Most investors balance this by maintaining a diversified portfolio that includes both income-producing assets and gold as a protective measure.
As one prominent investor says, “You don’t own gold because you expect to get rich; you own it because you want to stay rich.”
Volatility and market risks
Buying gold doesn’t mean immunity from short-term volatility. Price volatility is normal due to issues like geopolitical tensions, central bank policies, and economic data. For instance, gold prices dropped from $2,074 in March 2022 to $1,629 in September 2022 before rising again to over $2,500 in 2024.
These fluctuations can be unsettling for new investors. However, long-term gold holders focus on gold’s role as a wealth preserver rather than short-term price movements.
Costs of securing and storing physical gold
Owning gold in its physical form means you’ll need to consider storage options. You can store it at home but that comes with the risk of theft. Some investors use professional storage facilities which offer strong security measures and insurance coverage.
Note that these services have annual fees, typically from 0.4% to 1% of your gold’s value. Your actual costs depend on the value of your holdings and the storage provider. You’ll want to factor these costs into your overall financial planning.
Initial investment costs and fees
When dealers sell gold, they add a small premium over the spot market price. The premium, which is sometimes called a spread, considers the costs of minting, distribution, and dealer services. The specific rates vary by product and the dealer.
During high-demand periods, like the 2020 market volatility, premiums can temporarily increase. It’s always a good idea to buy gold before you need it to avoid overpaying.
Authentication requirements
You should always make sure you’re buying or selling authentic gold. After all, you don’t want to waste a lot of money on counterfeit products that you can’t resell. If you decide to go through the authentication process, it can add a small delay to transactions.
You can also skip this step if you work with established, reputable dealers like Swiss America who provide proper documentation for gold purchases.
Liquidity considerations
Gold is generally liquid. But converting physical gold to cash isn’t as immediate as selling stocks online. The process involves finding a reputable dealer and potentially shipping your gold if you’re not close to them.
This process is straightforward during regular market conditions, but it’s not instant. Some investors manage this by keeping a portion of their wealth in cash while using gold for longer-term wealth preservation.
Investing in physical gold: gold coins and bullion
Physical gold is a tangible asset available in various forms, including gold coins or bars.
Gold bars are one of the most popular and straightforward ways to own physical gold. These bars are available in various sizes, ranging from 1 ounce to 400 ounces. They come with stamped weights and purity levels and are usually 99.99% pure gold.
Coins are another way of investing in gold. Major governments mint the most widely circulated and recognized gold coins, including:
American Gold Buffalo
Canadian Gold Maple Leaf
Alternative ways to invest in gold
If you want diversified exposure to gold, here are the options available in the market, including their pros and cons.
Investing in gold mining stocks
You can invest in gold stocks by buying and selling shares in publicly traded firms like gold production or gold mining companies. Gold stocks provide exposure to the precious metals industry and the stock market without needing to own physical gold.
However, investing in gold this way doesn’t offer you the benefits of owning gold bullion. For instance, you don’t have a tangible asset, independence from the digital financial system, and a safe haven in periods of economic uncertainty. Your returns also depend on the performance of the companies and financial markets.
Gold futures and options
Gold futures and options are financial derivatives that allow investors to speculate on the future price of gold. Futures offer higher leverage but carry unlimited risk, while options provide more strategic flexibility with defined risk.
Overall, this is a risky investment category. Both require a deep understanding of derivatives and market mechanics, and they are also more suitable for experienced traders.
Gold ETFs and mutual funds
Gold mutual funds and exchange-traded funds (ETFs) pool money from multiple investors to invest in a diversified portfolio of gold-related assets. These financial instruments offer a convenient way to gain exposure to the gold market, especially for investors looking for a diversified portfolio.
On the downside, gold ETFs and mutual funds do not provide the same hedge against the collapse of the financial system. So, they are not an efficient store of value compared to gold bullion.
Making the most of gold investment
Now that you understand the pros and cons of investing in gold, let’s cover how you can maximize your experience.
Understanding gold prices and market trends
Gold prices respond to various factors in today’s market. The Federal Reserve’s monetary policy has some impact on gold. When interest rates fall, gold often becomes more attractive as yield-bearing investments like savings accounts lose their competitive edge. For example, during the Fed’s rapid rate hikes in 2022, gold prices initially dipped. But, as recession fears grew and rate-cut expectations emerged, gold surged above $2,600 per ounce.
Supply and demand also affect gold prices since they impact the gold reserves. Mining output has remained relatively flat since 2016 in the last decade. Meanwhile, central bank purchases hit record levels in 2022 and 2023, creating upward pressure on prices. This supply-demand effect suggests sustained support for gold prices moving forward.
Finding the right dealer and storage options
Selecting the right dealer can give you the best gold investment experience. Consider a dealer like Swiss America who:
Has a 40+ year history in the precious metals market.
Provides transparent pricing with clearly explained and competitive premiums.
Offers comprehensive customer education resources through our website, podcast and industry news.
Maintains strong customer ratings and reviews.
When you’re ready to buy physical gold, your dealer should guide you through the process. They should explain factors like delivery or storage options without using high-pressure sales tactics.
It’s also advisable to have a dealer who is willing to answer all your questions and help you understand the different products available.
Strategic timing and dollar-cost averaging
Even if you understand precious metal prices and market trends, it’s impossible to perfectly time the gold market just like with other investments. But, you can use strategic approaches to buy gold bars and coins.
Dollar-cost averaging is a popular recommendation among personal finance advisors since it can reduce the impact of price volatility. This strategy just means that you buy fixed dollar amounts at regular intervals. The DCA method allows you to accumulate gold over time while potentially averaging out your purchase price.
For example, instead of investing $12,000 at once, you might invest $1,000 monthly over a year. This strategy can help you avoid the stress of trying to “time the market” while building your portfolio.
Gold investment pros and cons
Physical gold investment has pros and cons to consider for your overall wealth creation and preservation goals. It’s best to keep a long-term perspective on gold as there could be some short-term price fluctuation. Also, consider the initial fees associated with buying gold bullion and the liquidity factor when it’s time to resell.
With that in check, gold is a stable investment. It helps to diversify your portfolio, acts as an inflation hedge, protects against currency devaluation, and preserves wealth over the long term. It’s a strategic portion of any well-diversified investment portfolio.
Ready to start adding gold to your investment portfolio and protect your wealth? Swiss America makes it easy, fast, and secure. Call us today for a free consultation.
Gold investment advantages and disadvantages: FAQ
Is gold investment worth it?
Yes, gold holdings can be a safe-haven asset when the economy turns sour and prices of stocks and bonds decline.
Is gold a good long-term investment?
Yes, investing in gold can be a great way to diversify a portfolio and hedge against inflation in the long term.
Can I invest in gold with a small budget?
Yes, you can start investing in gold with a small budget by buying smaller units like fractional gold coins. You can also set up a recurring purchase plan with your dealer to accumulate the precious metal at your pace.
Note: The information in this post is for informational purposes only and should not be considered tax or legal advice. Please consult with your own tax professionals before making any decisions or taking action based on this information.
