With economic uncertainty on the rise, many people are looking for safe places to store their savings. One traditional option is gold, which has been used as a store of value for thousands of years. But is buying gold still a good idea in today’s market? Here is an in-depth look at the pros and cons.
The Potential Benefits of Owning Gold
There are several potential benefits to keeping some of your savings in gold:
- Hedge against inflation – Gold has historically held its value better than currency during times of high inflation. With central banks printing money at record levels, inflation is a growing concern.
- Portfolio diversification – Adding gold to a portfolio of stocks and bonds can help reduce overall risk. The price of gold often moves independently from other assets.
- Global demand – Gold is universally valued and has high liquidity. There is strong demand worldwide, especially in emerging markets like China and India.
- Tangible asset – Gold is a physical asset with inherent value, unlike “fiat” currencies that are not backed by physical reserves.
- Safe haven appeal – During times of geopolitical or economic crisis, investors often flock to gold as a safe haven asset.
- Limited supply – The amount of gold in the world is finite. Approximately 90% of all gold ever mined is still available today. Gold cannot be printed or created easily like fiat money.
For these reasons, gold can provide portfolio insurance and help protect savings from being eroded by inflation or market turmoil. It has historically performed well during periods of high uncertainty.
The Potential Downsides of Owning Gold
However, there are also some potential downsides to keeping savings in gold that should be considered:
- No yield – Gold does not provide interest or dividends. It must appreciate in price to deliver returns.
- Volatile prices – The price of gold can swing significantly in the short-term, although it has maintained its value over the long run.
- Costly to store – Holding physical gold comes with storage, transportation, and insurance costs that can eat into returns.
- Not a direct currency – Gold cannot be used directly for everyday purchases like fiat currencies.
- Tax treatment – Some gold investments may be subject to special tax rules compared to stocks or bonds.
- Non-productive asset – Gold cannot increase earnings or provide income like a business asset. Its value stems only from perceived scarcity and demand.
While gold has stood the test of time as a long-term store of value, investors need to be aware it does come with risks and costs as well.
Factors to Consider Before Buying Gold
If you are considering putting some savings into gold, here are some key factors to take into account:
- Your time horizon – Gold may be more appropriate for longer-term goals 5-10+ years away. It is prone to shorter-term price swings.
- Your risk tolerance – Gold can see sharp price declines at times. Be prepared to hold on during protracted slumps.
- Portfolio balance – Most experts recommend allocating no more than 10% of a portfolio to gold.
- Investment alternatives – Compare gold to other assets such as stocks, bonds, real estate based on expected risk-adjusted returns.
- Physical vs. mining stocks – Physical gold provides direct exposure, while mining stocks add operational risks but may offer higher returns.
- Gold certificates – These provide gold ownership without the storage hassles but come with counterparty risks.
- Tax efficiency – Certain gold securities may offer preferential tax treatment over bullion coins or bars.
Determining how much to invest in gold depends entirely on your personal situation – there is no universal rule. Many financial advisors suggest a small allocation of 5-10% as part of a well-diversified portfolio.
Ways to Invest in Gold
If you decide to invest in gold, here are some of the different options to consider:
- Physical bullion – Coins and bars allow direct ownership of gold. Storage and security are important considerations.
- Gold ETFs – Exchange traded funds like GLD offer direct exposure without physical ownership.
- Gold mutual funds – Professionally managed funds invest in gold securities on your behalf.
- Gold mining stocks – Shares of companies engaged in gold mining and production.
- Gold futures & options – Sophisticated derivatives for trading gold price movements.
- Gold certificates – Certificate notes backed by physical gold stored elsewhere.
- Gold IRA – Lets you hold physical gold in a self-directed Individual Retirement Account.
The best option depends on your investment size, risk tolerance, time horizon, and preference for physical gold versus financial instruments. Many investors hold a combination of physical bullion along with gold funds, stocks, and certificates to get broad exposure to the gold market.
Historical Performance of Gold
Gold has been used as a store of value and medium of exchange for thousands of years. Here is a look at how gold has performed historically both in absolute terms and relative to other major asset classes:
| Time Period | Gold Performance | S&P 500 Performance | Bond Performance |
|---|---|---|---|
| 2000-2010 | +334% | -10% | +80% |
| 2010-2020 | +25% | +191% | +36% |
| 2020-Current | -10% | +24% | -15% |
| 50 Years | +150% | +190% | +70% |
While gold can see interim slumps like any asset, it has appreciated significantly over the long run – living up to its reputation as an inflation hedge and store of value. However, it has generally underperformed equities and bonds over the very long term. The key role for gold in a portfolio is diversification and insurance against crisis, rather than raw performance.
Current Outlook for Gold Prices
Given the unprecedented amount of stimulus spending and central bank money creation occurring today, many analysts foresee upside for gold prices going forward. Some of the factors that could drive gold higher include:
- Inflationary pressures from monetary expansion
- Negative real yields where bonds offer returns below inflation
- Currency debasement fears if central banks tolerate higher inflation
- Stock market volatility or an equities bear market
- Geopolitical tensions between superpowers
- Supply chain disruptions and global instability
However, forecasting gold prices is notoriously difficult. Other factors could potentially dampen gold’s performance:
- Rising real yields on sovereign bonds
- Deflation or disinflation instead of rising prices
- Strong performance of equity markets
- Peaking of economic uncertainty
- Loss of safe haven demand
Due to these crosscurrents, analysts’ estimates for future gold prices range widely from $1,500 on the low end to $3,000+ on the bull case. A reasonable baseline might be an average gold price between $1,750-$2,000/oz over the next 3-5 years. However, there are persuasive cases to be made for scenarios above and below that range.
Should You Keep Savings in Gold?
Here are some final considerations when deciding whether to buy gold as part of your savings strategy:
- Gold can provide an alternative to cash deposits or bonds with no yield
- A small gold allocation (under 10%) may offer portfolio diversification
- Long-term historical performance shows gold can hold value over time
- Safe haven demand rises during periods of uncertainty
- Supply constraints limit sudden increases in the gold supply
- Gold pays no income and has carrying costs for storage
- Prices can be volatile, especially over shorter horizons
- Other assets like stocks and real estate provide higher long-term returns
- Investors need discipline to hold gold during intermittent slumps
Conclusion
Gold can play a role in a savings allocation, but it should not dominate the portfolio. Having a modest portion of net worth held in physical gold and gold-related investments can provide diversification benefits and a hedge against inflation or systemic risks. However, investors need reasonable return expectations and a buy-and-hold mindset to handle gold’s volatility. Talking to a financial advisor can help determine if and how gold should fit into your overall savings and investment strategy.