Gold Fashioned: Is Gold Still a Good Investment?
Gold is the closest thing we have to sound money. It may still be an effective store of value, but is gold a good investment today?
Updated Mar 22, 2022
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Gold
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While most portfolios are optimized for growth and returns, every genre of investor considers investing in gold at one point or another.
There are various outlooks on gold as an asset: Some see it as sound currency and a superior store of value (sit down, Bitcoin), while others see it as a luxury commodity to make luxury watches and necklaces. There are also those who see only the disadvantages of investing in gold and are skeptical about its impracticality and limited utility as an investment.
Despite gold being a decent store of value and a sought-after commodity, investors must consider the broader economic context before making a gold investment.
So, is investing in gold a good idea? While the answer might be yes, gold investments are only effective if they're part of a structured investment plan that's designed to meet your goals as an investor.
How to invest in gold?
How to invest in gold?
While investing in physical gold is an option for most investors, not everyone has access to gold coins or can afford the significant overhead of storage, maintenance, insurance, and administrative and legal headaches of owning gold bars. Anyone can hypothetically buy gold bullion and purchase a safe to store it in, but the best ways to gain exposure to gold are through gold stocks and gold exchange-traded funds (ETFs).
The main reason you'd want to add gold to your portfolio is for stability. Generally, gold prices have stayed stable relative to the stock market and physical gold is a great inflation hedge due to its scarcity and sustained demand. Buying gold bars is the ideal way to invest, but the closest alternative is buying gold using platforms like Vaulted, OneGold, and Hard Assets Alliance.
Gold stocks
Gold stocks refer to companies that deal with physical gold as a commodity. The best gold stocks are gold mining companies or other precious metals companies with significant involvement in the gold supply chain. Investing in gold companies is easy on platforms like Public and Stash, but the whether they're a good fit in your investment portfolio depends more on your risk tolerance and less on the gold price.
Other gold stocks include mining exploration companies looking for gold deposits to exploit, gold refinement companies, gold jewelry companies, or any company exposed to gold as a commodity. While gold stocks can be a good investment, their prices are significantly less correlated with the spot price of physical gold since gold is not the underlying asset. In other words, the gold price isn't as important when you invest in companies dealing with gold.
Gold ETFs
Investors who want to gain exposure to gold as an asset without having to deal with it physically can do so by buying shares of a gold ETF. Gold ETFs are managed funds where gold is the underlying asset, which means that each share of a gold ETF is a security that represents the value of gold minus the cost of storing it somewhere else.
Gold ETFs are one of the most convenient ways for investors to gain exposure to gold as an underlying asset because all the extraneous costs of gold investing are already priced in. It's easier to sell or buy gold ETFs than physical gold, but the downside is that their prices are more correlated to overall stock market performance than gold coins or bullion are.
Gold stablecoins
Gold stablecoins
The fact that you can buy gold-backed cryptocurrencies is a testament to the popularity of this commodity. Stablecoins are blockchain tokens representing a stable value—usually fiat currencies, but also reserve assets like gold. The safest stablecoin tied to gold is arguably PAX Gold (PAXG), which is also the biggest, but Tether offers XAUT as an alternative.
Gold stablecoins have just as short a track record as every other stablecoin. This means that, while assets like PAXG are a relatively risky way to invest in gold, they're not significantly riskier than holding USDC or USDT and are arguably less risky than cryptos like ETH. The strongest argument against gold stablecoins is that there isn't sufficient regulation ensuring they're fully backed by the underlying asset, although this can be more true for some than others.
The main reason you would invest in gold stablecoins is transferability: there's nothing stopping you from sending a crypto token to someone else, whereas sending someone a gold ETF is more challenging than moving a gold coin or some gold jewelry—transferring gold bullion is a logistic nightmare. Another perk of gold stablecoins is that they enable you to utilize gold in DeFi yield farming strategies.