Whenever gold seems to do well, there’s a rush to buy amid the hope that it will continue to rise. Fears about the stability of the U.S. dollar also tend to push gold prices up. However, before you decide that you need to buy gold immediately, it’s a good idea to take a step back. Gold is an asset like any other—it can rise or fall due to sentiment.
Key Takeaways
- Gold can be a worthwhile addition to a diversified portfolio, but it might not suit all investors.
- One rule of thumb is to keep gold to no more than 10% of your overall account value.
- Gold has previously moved in the opposite direction of the U.S. dollar, so some investors use it as a hedge against inflation.
- Some investors believe that gold would have intrinsic value in extreme scenarios of economic collapse, but that is much more speculative than gold's well-documented use as an inflation hedge.
Why Do People Like Gold So Much?
First of all, it helps to understand why some investors like gold so much, by looking at its history. In many cases, it has to do with the idea that gold is, well, gold. It’s been valuable for thousands of years. Unlike so much of our money today, which we access via card or by making information transfers, it’s possible to touch gold.
It’s easy to look at gold and see the tangible value. Keep in mind, though, that the price of gold rises and falls like that of other assets. Price movements aren’t always based on some intrinsic value. Perception of how markets are doing, the strength of the U.S. dollar, and other factors influence what gold is “worth.”
Even though gold has a long history as money, that doesn’t mean it’s the best choice for your portfolio. There are some good (and some terrible) reasons to include gold in your portfolio.
Hedge Against Inflation
One of the biggest reasons to include gold in your portfolio is to hedge against inflation. As a value storage vehicle, gold has managed to do pretty well over time. Inflation can erode the spending power of a dollar, but gold can help you hedge against that loss of value.
Gold prices often move opposite to the dollar, so if the greenback weakens, gold is likely to strengthen. However, even when gold isn’t heading higher at a rapid rate, it is still considered a pretty decent way to keep from losing out to inflation.
Asset Diversity in Your Portfolio
If you don’t think bonds and stocks provide enough diversity, adding a little gold can help you feel more comfortable. Gold often moves in the opposite direction of the stock market. So, if the stock market drops, gold often heads higher. If you want to add some balance to your portfolio, gold can be one way to do it by diversifying your assets in a way that can partially protect you from a market event.
How Much Gold Should Be in Your Portfolio?
Your portfolio should be structured in a way that helps you reach your long-term goals. Gold might have a place. However, many experts warn that you should be wary of how much gold to include in your portfolio. One rule of thumb is to limit gold to no more than 5% to 10% of your portfolio. Depending on your situation and your risk tolerance, you might be more comfortable with a bigger or smaller share of gold in your portfolio.
Is Gold Really Useful?
Some investors believe that gold isn’t just a hedge against inflation or a useful part of a diversified portfolio. They believe that there are intrinsic uses for gold.
Unfortunately, if you are stockpiling bullion against economic collapse, you might be in for a rude awakening. In such a scenario, would your neighbors be able to use gold? Instead, during the economic apocalypse, you might be better off with a cache of food and water—and the ability to hunt, fish, or grow a garden.
Some believe that if the United States were to move to a gold standard, it would benefit from its gold stores. The chance that we will see a gold standard in the near future is pretty slim. There is so much money in circulation (paper and digital) that switching to a gold standard is impractical and highly unlikely. Our financial system would likely need to collapse completely to make such a switch feasible.
In the end, gold can make a fine addition to your portfolio—as long as you know why you include it—and it can help you reach your long-term financial objectives.
Frequently Asked Questions (FAQs)
What's the cheapest way to buy gold?
Buying physical gold often comes with high sales costs, and it also comes with the risk of trusting the retailer to sell pure gold. If you don't care about whether or not you can touch the gold you own, then the cheapest way to buy it is through an exchange-traded fund (ETF) or a mutual fund.
How much gold should I have in my portfolio as opposed to silver?
Choosing between gold and silver ultimately comes down to investor preference. Some investors will use technical analysis to determine whether gold or silver is a better investment at that point. Others prefer gold, no matter what's happening with the market, due to its long history as a store of value. Another strategy is to invest in mining companies or metals sector ETFs that offer diversified exposure to many different kinds of metals.
How much gold can you own?
There aren't any limits on how much gold you can own. Some 244,000 metric tons of gold have been discovered in the world so far. That includes 187,000 metric tons of mined gold and 57,000 metric tons of underground reserves. If you had an infinite amount of money, you could theoretically try to convince all of the owners of all of that gold to sell it to you.
I possess a deep understanding of finance, investments, and the role of precious metals in portfolios. My training data includes extensive information on financial markets, assets, and investment strategies up to January 2022.
Concepts Related to the Article:
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Gold as an Asset: Gold is often considered a safe-haven asset, meaning investors flock to it during times of economic uncertainty. Its value is driven by various factors, including supply and demand dynamics, geopolitical tensions, interest rates, and currency fluctuations.
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U.S. Dollar and Gold: Historically, there's an inverse relationship between the U.S. dollar and gold prices. When the dollar weakens, gold prices tend to rise, and vice versa. This relationship makes gold attractive as a hedge against currency depreciation.
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Hedge Against Inflation: Gold has been used as a hedge against inflation for centuries. Unlike fiat currencies that can be printed in unlimited quantities, the supply of gold is limited. This scarcity helps protect its value against rising prices.
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Diversification: Including gold in a portfolio can enhance diversification. Gold often exhibits low or negative correlation with other assets like stocks and bonds, which means it can reduce portfolio volatility and potentially improve risk-adjusted returns.
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Portfolio Allocation: While gold can be beneficial, it's crucial to allocate it appropriately in a portfolio. The recommended allocation often ranges between 5% to 10% of the total portfolio value, but individual preferences, risk tolerance, and market conditions can influence this allocation.
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Intrinsic Value of Gold: While gold has industrial applications, its primary value proposition is as a store of value and a medium of exchange. The concept of intrinsic value is subjective and varies among investors. In extreme economic collapse scenarios, the practical utility of gold can be limited compared to essential goods like food, water, and shelter.
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Gold Standard: A gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold. The U.S. abandoned the gold standard in the 1970s. Reverting to a gold standard is considered impractical given the complexities of the modern financial system and the vast amount of currency in circulation.
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Buying Gold: Investors have various options to invest in gold, including physical bullion, gold ETFs, and gold mining stocks. The choice depends on factors like convenience, costs, and investment objectives.
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Gold vs. Silver: Both gold and silver are precious metals with distinct characteristics. While gold is often seen as a store of value, silver has more industrial applications. The choice between the two depends on individual preferences, market conditions, and investment goals.
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Ownership of Gold: There are no legal limits on how much gold an individual can own. However, the practicality and feasibility of acquiring vast amounts of gold are constrained by factors like availability, cost, and market dynamics.
In summary, while gold has unique properties that make it appealing to investors, its role in a portfolio should be carefully considered based on individual circ*mstances, objectives, and risk tolerance.
