Is Gold a Good Long-term Investment?

Precious metals are something many people consider. Gold could be a long-term investment strategy if you’re trying to expand your investment portfolio or simply want to branch out from the traditional stocks and bonds. Today, you’ll learn about its historical performance, influential factors, and all the rest.

Understanding Gold as an Investment

Gold is ultimately considered a safe investment. In fact, safe haven assets like precious metals are often ideal when the markets decline because the price of gold rarely moves with stock market pricing. However, gold could also be a risky investment strategy because history shows that gold prices don’t always rise, especially when the markets soar.

Overall, investors turn to this physical metal when there’s fear in the market. They believe the market will go down, meaning gold performs better.

When taking into consideration gold’s role as a strategic asset, it however isn’t an income-generating asset. Ultimately, unlike bonds and stocks, price appreciation primarily affects the return on gold. Plus, investing in gold carries some unique costs. Because it’s a physical asset, it requires insurance and storage. Market volatility is also something to consider, and gold prices tend to drop fast at times.

In a sense, gold works well in a diversified portfolio. You can use it to hedge against inflation. Let’s take a deeper look into gold.

Gold: A Historical Perspective

It’s time to gain a more historical perspective on gold prices. In January 1934, the Gold Reserve Act was introduced. President Richard Nixon then closed the gold purchase window in August 1971. Between those years, the price of gold was about $35 per ounce.

Before the Gold Reserve Act was initiated, President Franklin D. Roosevelt required all citizens to surrender their gold bullion, notes, and coins for US dollars. This made investing in gold difficult, futile, and sometimes impossible. Even those who could hide large quantities of gold or hoard it found it troublesome to get rid of it.

In the first quarter of 2022, the price of gold was $2,000 per ounce. Compared to 1971 and $35, that’s a price appreciation of about 5,700 percent.

Evolution of Gold Prices Over the Years

The price of gold has ultimately gone up throughout the past half-century. However, the trajectory moves in bursts and stops. Overall, the US kept with the gold standard until 1971. This pegged the price of gold and the dollar. Now, the price of gold and the US dollar are uncoupled.

Typically, gold prices usually fall when the dollar strengthens. It’s an inverse relationship and why many gold investors use it to counterbalance unpredictable events and inflations.

Performance Analysis: Gold as a Long-Term Investment

Most people see gold as a durable inflation hedge and store of value. In the long run, though, stocks and bonds tend to outperform the price of gold (increase). Regardless, short-term investing can bring profits with gold.

Overall, it’s wise to have a diverse investment portfolio, and gold should be part of that.

The Intricacies of Gold’s Value

Let’s take a look at the details of gold’s value:

Impact of Economic Fluctuations

The economy isn’t a set thing; it rises and drops periodically. However, most experts can determine when this will happen and can prepare. When things go south without warning, people turn to precious metal products because they’re considered safe and can counterbalance unpredictable events and inflation.

Influence of Political Instability

Gold often retains its value during financial uncertainty. However, it is also a great option during political instability. It’s considered a crisis commodity; people flee to it because it’s relatively safe compared to other options. When there’s little or no confidence in the government, gold prices soar!

Correlation with Inflation

Overall, gold is an excellent hedge against inflation since the price often rises when cost of living prices skyrocket. In the last 50 years, investors have seen prices soar while the stock market plunges. This is because fiat currency will lose its purchasing power from inflation. Gold is often priced in such currency units, so it rises with everything else.

Ultimately, gold is also a good store of value. People are often encouraged to buy gold if they believe that the local currency is losing or will lose its value.

Be aware that inflation soared high in the US during 2022. However, gold prices declined in that year because the US dollar was stronger than other currencies. Still, inflation hasn’t dropped and continues to rise. There’s also a recession to consider, so gold prices rose in 2023.

Gold in the Investment Universe

There are countless things you can invest in, and it’s important to understand where gold fits into that. Let’s learn more:

Gold vs. Traditional Investments: Stocks and Bonds

When you evaluate gold’s performance as a long-term investment, you must focus on the period of time analyzed. For example, stocks have been better than gold and bonds over some 30-year periods. However, gold outperformed the stock market over certain 15-year periods.

Between 1990 and 2020, gold prices increased by about 360 percent. In that same period, the DJIA (Dow Jones Industrial Average) went up 991 percent.

If you look at the period from 2005 to 2020, you’ll see gold prices went up by 330 percent, which is about the same as the 30-year comparison. In that same period, the DJIA only increased by about 153 percent.

Over the long term, stocks tend to outperform gold, but gold wins in shorter time periods.

Let’s turn to bonds now. The average rate of return for corporate bonds between 1920 and 2020 is about five percent. Therefore, corporate bonds have seen an increase of about 330 percent in that time frame, which is similar to gold.

Gold vs. Modern Investments: Cryptocurrency

The first cryptocurrency, Bitcoin, emerged back in 2009, and it’s outperformed most asset classes, including gold. In fact, it went from less than $1 to thousands of dollars. Since it is scarce and doesn’t have a wide new supply option, most equate cryptocurrencies with digital gold. However, if you look at the past two years, gold has outperformed crypto.

Both options can be great assets for your portfolio. However, it’s wise to keep the full amount you invest under five to 10 percent.

The Role of Gold in Portfolio Diversification

Diversification happens when you find investments that aren’t closely related to each other. Historically, gold has a negative correlation to various financial instruments, including stocks. The recent history also indicates this.

• In the 1970s, gold saw increases, but stocks were down.
• Stocks soared in the 1980s and 1990s, but gold wasn’t that high.
• Consumers migrated primarily to gold in 2008, so stocks dropped significantly.

Overall, incorporating gold into a diversification strategy means combining stocks and bonds with the precious metal in one portfolio to reduce risk and volatility all around.

Weighing the Pros and Cons of Gold Investment

It’s now time to determine the benefits and drawbacks of gold investing. Let’s take a look at them now:

The Upside of Gold Investment

Here are the benefits of gold investment:

Gold as an Inflation Shield

As inflation continues rising, the purchasing power of the US dollar drops. If you have cash, it’s like you’re losing money. However, gold prices might increase in value during times of inflation. Everyone does not agree with this, but it’s still a deciding factor.

Liquidity: Gold’s Key Advantage

Though gold’s performance can be volatile, people have proven that it holds its value in the long run. Likewise, gold is an accessible and liquid asset. Therefore, you can easily buy and sell it when you want. Purchasing a small amount of gold when you’re young can help you balance your investment portfolio later.

Gold: A Safe Haven in Turbulent Times

Buying gold can help you get through uncertain times because gold prices might rise in those periods, the investment can be as seen as a safety in gold IRAs. The Federal Reserve Bank of Chicago analyzed this option. In the study, it compared gold prices to one study from the University of Michigan on consumer expectations. Within, it learned that when more consumers have pessimistic expectations, the price of gold rises.

The Downside of Gold Investment

Though it’s helpful to know the benefits of gold as a long-term investment, you also have to consider the drawbacks. These include:

Dealing with Gold’s Volatility

Gold often outpaces other asset classes at times, but it won’t hold up in terms of long-term price appreciation. Therefore, if you wish to save for retirement, you don’t want too much of your money in gold because you won’t see long-term gains.

Likewise, people often turn to gold when the market is shaky, so investors make their decisions based on fear instead of long-term needs. Often retail investors use emotions and hurt themselves.

Absence of Dividends: A Consideration

Many people aren’t familiar with gold or the precious metals asset class as a whole. Therefore, they don’t realize that there are no dividends.

For example, when you have stocks, IRAs, and other investment options, you will either get dividends or see the growth in time. Gold isn’t like that. You simply buy it, store it, and sell it later. Selling gold can be tricky because you must find the right buyer.

Navigating Storage and Security Challenges

If you wish to invest in gold, you have to think about storing and protecting it. Physical gold must be kept in a safety deposit box or in your home safe. What happens if someone steals it? You’re out all that money and have nothing to show for it.

The How-To of Gold Investment

Understanding the benefits of gold is the first step, but guide on managing a Gold IRA is the next and the most important. Firstly, you must determine how to invest in it. Here are some options:

Investing in Physical Gold: A Tangible Asset

Investors can buy physical gold in bars and coins, which offers more comfort. They can see and touch it, which gives them peace of mind. Still, gold is a tangible asset and this form is the most expensive because there are premiums for the gold pieces, and you have to insure and store them.

A better option might be a gold IRA. Though you don’t hold the gold yourself, it’s stored in a depository, and you buy and sell through a custodian.

Gold Stocks: An Indirect Investment Approach

Gold streaming and royalty stocks are an excellent option for gold investing. They are often less risky because those gold mining companies don’t operate the mines. With a royalty deal, the company pays someone upfront and gets a percentage of the revenue generated from the mine. In streaming deals, companies pay miners upfront to get a percentage of the metal (they hold gold).

Gold ETFs: A Blend of Convenience and Exposure

When investors want to be exposed to physical gold without storing or insuring it, they can use gold-backed ETFs (exchange-traded funds). These have shares that are tied to the gold in bank vaults.

Gold Futures: For the Risk-Tolerant Investor

Gold investing can be quite complicated. Gold futures and options require more maintenance than other options. Plus, they have more risk involved, though the derivatives can be higher, too.

Gazing into the Future of Gold Investment

Overall, the most important consideration for precious metal investing is volatility. Gold might retain its value, but the short-term changes can be jarring. Overall, experts feel that gold’s trajectory should be higher in 2024, though that could change throughout the years.

Long-Term Outlook for Physical Gold

It’s impossible to predict performances of any asset based on its past performance. However, there are a few factors to consider when deciding if you should invest in precious metal products. Buying tangible gold means there are no ongoing management fees. Though the price of gold varies each year, it should retain its intrinsic value, regardless of what happens.

Anticipating the Impact of External Factors on Gold

There are countless external factors that could impact the price of precious metals in the future. For example, central banks broke records in the first half of 2023, and gold is still in demand. The global reserves rose by about 337 metric tons, which is the second-highest third quarter on record, according to the World Gold Council.

Overall, central banks create more debt, which leads to inflation and many other issues. This is expected to continue into 2024 and beyond.

Frequently Asked Questions

Can I Invest in Gold and Other Precious Metals without Physically Holding It?

Yes! You do not have to own precious metals, such as gold bars and gold coins, and store them in your home safe. You can consider a gold IRA, stocks from gold mining companies, and much more.

How Much Money Should I Invest in Gold?

When considering gold investments, it’s wise to allocate about five to 10 percent of your portfolio to all alternative assets. This includes gold and everything else.

How Do I Start Investing in Gold and Precious Metal Products?

If you want to begin your gold investment journey, you may consider buying a few gold coins to keep at home if you’re new to investing. However, most people purchase a few stocks, open an IRA, and buy precious metals jewelry.

How Can I Buy Gold?

It’s easy to buy gold through an IRA or an online dealer, but you might also consider going to a collector or local dealer. Likewise, pawn shops sell gold, though you should understand that they often have high markups.

What Are the Potential Risks of Investing in Gold?

Typically, the risk is low if you hold gold, but investing does include some downsides, such as:

• Economic factors
• Insurance
• Storage
• Political impacts
• Inflation

Conclusion

Most people want their investment portfolios padded to protect against economic uncertainty, inflation, and all the rest. Is gold a good long-term investment?

Ultimately, investing in gold is an ideal solution.

You learned about the impact gold has on the global economy, how it correlates with inflation, and the benefits/drawbacks it offers. Overall, gold has the potential to be a long-term investment, but it’s best to speak with a financial advisor to determine what’s right for you.