Gold Fashioned: Is Gold Still a Good Investment?

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?

Gold Fashioned: Is Gold Still a Good Investment?
Guy Ovadia

Published Mar 22, 2022Updated Sep 17, 2022

Gold

Gold

Getting Started

Getting Started

Balanced Investing

Balanced Investing

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?

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

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.

Is investing in gold a good idea?

Generally speaking, having something in common with the balance sheet of central banks is a good idea. While the importance of gold has waned in the global economy, gold is still used as a crucial store of value by institutions like the Federal Reserve and the International Monetary Fund.

Additionally, gold is typically uncorrelated with stocks and serves as a hedge against inflation of fiat currencies like the U.S. dollar. 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.

Advantages of investing in gold

  • Time-tested store of value
  • Rising demand leads to price appreciation
  • Easier to invest with gold investment platforms

The main advantage of gold is that it's a scarce and sought-after luxury commodity, and gold investments have withstood the test of time as the best store of value. The gold market is saturated with gold derivatives, and alternative investing platforms are making investing in gold as a commodity quicker and more accessible than ever. 

With record-breaking inflation of the U.S. dollar by the federal reserve in 2021, demand for other reserve assets like gold is rising and, consequently, the value of gold is appreciating. So not only is buying gold one of the most effective hedges against inflation but is also a great hedge against risk in cryptocurrencies and other investments.

Disadvantages of investing in gold

  • Historical returns are low
  • Additional costs like storage, insurance, and capital gains taxes
  • Gold prices may fall with rising interest rates

The reverse side of inflation is the interest rate hikes being instituted by the federal reserve. As the interest rate of borrowing the U.S. dollar goes up, less money gets borrowed by entities that need large loans. This results in companies liquidating assets like gold in order to raise their cash supply while avoiding borrowing and paying interest altogether. As the federal reserve hikes interest rates, more companies that hold precious metals in their portfolios may be inclined to sell, thus driving down market prices for gold.

And while gold may provide a relatively stable store of value, don't expect it to provide you with impressive growth. Historical returns are modest, and on top of that, costs associated with gold investments—such as storage, insurance, and a typically higher tax rate on earnings—can eat into those returns. Finally, gold may be subject to technological disruption as Bitcoin and other cryptocurrencies with built-in digital scarcity challenge the importance of gold as a reserve asset, thus bringing down gold prices in the long term.

When should I invest in gold?

Investors must stay up to date with macroeconomic trends—especially the impacts of inflation and Federal Reserve interest rates—in order to get the most out of their gold investment.

Historically, the market price of gold trends upward during the year, with prices in the first quarter often being lower than in the fourth quarter. Gold investing is like almost every other investment in that the conventional wisdom of 'buy low, sell high' still applies, so that's the golden rule (no pun intended) investors should follow.

Although there isn't necessarily a best time to invest in gold—that depends on the goals of the investor—there are opportunities when certain economic conditions arise that can be optimal to get into a long-term gold investment. Anything from government action or the passage of a certain law, to a geopolitical conflict or even a domestic economic crisis, can impact gold prices.  While events that cause uncertainty generally make gold prices go up, it can sometimes be impossible to time the market because there's usually no frame of reference that can help predict such events or inform how they will impact gold prices.

hard-assets-alliance
Hard Assets Alliance

Gold

How should I invest in gold?

Gold is a quintessential part of a diversified portfolio, but choosing how to invest in gold depends on your investing style. For the hands-off retail investor, gold ETFs or mutual funds are a great way to gain exposure to gold as an asset. Buying shares in a gold mining company that pays dividends could also be worthwhile. Buying physical gold is always an option: Gold bullion is the best for storing value, but a well-made piece of gold jewelry could make returns on the secondary market.

Finally, buying gold is easiest and most convenient with investing platforms like Vaulted or OneGold. Investing in gold with them means things like storage and insurance are already taken care of for you, and all you have to do when buying gold is choose how much you want and when to sell it. Investing in gold through these platforms provides the convenience of gold stocks, the reliability of gold bars, and the expertise of mutual funds all rolled into one.

onegold
OneGold

Gold

OneGold is a precious metals investing platform where users sign up to buy and sell digital assets backed 100% by gold stored by OneGold's vaulting partners. All of OneGold's assets are insured, which gives investors peace of mind as they instantly buy and sell gold and other precious metals. If gold investing is part of your retirement strategy, consider investing in gold through a self-directed IRA with OneGold.

vaulted
Vaulted

Gold

Another alternative investing platform you can use to buy and sell gold is Vaulted. Vaulted lets investors buy fractional pieces of pure gold bullions stored in the Royal Canadian Mint. For a small fee, Investors can buy gold through vaulted and are assigned a serial number correlated to their gold which they can sell on Vaulted's marketplace when the price goes up. Vaulted is the most convenient way to invest directly in gold because investors can request to have their gold shipped to them whenever they want.