Pros And Cons To Investing In Gold: A Complete Guide

Portable and easy to trade, gold has been a popular tool for storing wealth for much of human history. Even though we have substantially better-performing investment options today, gold remains a popular choice for investors.

While investing in gold offers considerable drawbacks, there are advantages to including it in your portfolio. If you are considering investing in gold, it is important to understand how it compares first.

The Pros and Cons of Buying Gold as an Investment

Pros of Investing in Gold

• Protection against market downturns. Gold can be a safe-haven asset. Investors often buy gold to protect their savings in the event of a market crash. For example, the price of gold went up by more than 100% between 2008 and 2012, the height of the financial crisis. As nearly all other assets lost money, demand for gold grew because of its perceived reputation for safety.
• Hyperinflation hedge. Many investors believe that gold serves as an inflation hedge, when in reality, it’s a hyperinflation hedge. “The correlation between gold and inflation isn’t particularly strong (a 16% move in gold for every 100% move in USD). In that sense [gold’s] value as an inflation hedge is only really present in localities where the USD isn’t a primary currency and hyperinflation has been a persistent concern [like some countries] in Africa and South America ,” says Daniel Yerger, MBA, CFP®, ChFC®, AIF®, and Forbes Advisory Board member.
• Extra portfolio diversification. Portfolio diversification is an investment strategy in which people spread the value of their portfolio across various assets. This allows you to minimize losses, as it’s unlikely that every asset will suffer from the same market conditions. In theory, the more diversification, the better. Gold is another asset you could add to your portfolio beyond traditional stocks and bonds to increase diversification.

Cons of Investing in Gold

• Does not generate income. The only way to make money investing in gold is if the price goes up. There is no stream of income associated with the investment. Other investments provide income in addition to gains from price appreciation. For example, stocks earn dividends, bonds earn interest and investment real estate earns rent.
• Extra costs. There are often extra costs that are frequently hidden associated with owning and storing gold. If you keep the gold at your house, you may need to pay transportation costs to get it there and you will likely want insurance to protect against theft. But keeping a large amount of gold at home is risky. It is safer to store the gold in a bank safety deposit box or a gold vault service. These are extra costs that reduce your overall return.
• Higher taxes on physical gold. If you sell physical gold for more than you paid, you will owe capital gains on the profit. The long-term capital gains rate for gold can be up to 28%. On stocks, bonds and other market investments, the long-term capital gains rate is 20% at most and 15% for most investors.

Ways To Invest in Gold

There are a few different ways to invest in gold. The most efficient method with the lowest associated transaction costs is investing in gold stocks or gold ETFs. You can also purchase shares in gold mining and refining companies. These companies tend to deliver better returns as gold prices increase. However, it is important to research the company’s performance and fundamentals before investing.

Any of these options allow you to have a portion of your portfolio invested in precious metals without any of the associated risks, increased capital gains or difficulty buying and selling physical gold.

If you prefer to own physical gold, you can purchase it in the form of gold coins or gold bars, also known as bullion.

You can also buy gold jewelry. When the price of gold goes up, so will the resale value of your jewelry. Plus, you also have an item that you or your family members can wear.

Keep in mind that selling physical gold, whether in bullion or jewelry form, can be difficult to sell quickly for a high value. If you find yourself in need of liquidity, gold stocks or shares of stock in gold mining companies are much faster to sell than thousands of dollars in bullion. Your local precious metals dealer, jeweler or pawn shop is unlikely to give you a fair offer if you need to quickly turn your gold into cash.

Is Gold a Good Investment Option?

Gold can be a good investment option in specific situations, such as periods of extreme volatility in the stock market or periods of currency instability or civil unrest. During these scenarios, gold can outperform other investment classes.

However, gold is typically a poor investment option when the economy is strong. It will often lose money during these periods as investors sell gold to put their money in the stock market and other growth assets.

In the long run, gold has a significantly lower average annual return than stocks. From 1971 to 2024, the stock market delivered average annual returns of 10.70%. Gold delivered an average annual return of 7.98% over the same period.

How Much Gold Should I Own in My Investment Portfolio?

Gold can play an important role in your financial plan, but it should not be the bulk of your investment portfolio. Experts recommend that if you must keep gold in your portfolio, limit it to between 3% and 6%, depending on your risk profile.

Having a small percentage of your portfolio in gold will offer some protection against economic uncertainty and hyperinflation. The rest of your portfolio should go into investments with more expected growth potential like stocks or with more stability, like bonds.

Tips for Investing in Gold

1. Consider gold stocks and funds for liquidity.

Gold stocks, ETFs and mutual funds are much easier to buy and sell than physical gold. You can make these trades immediately through your brokerage account. While these electronic investments don’t have the same visual appeal as physical gold, they can make your life easier as an investor.

2. Stick to standardized investments.

You can buy gold coins, jewelry and other collectibles in many ways. But as a pure investment, it is best to stick to standardized options with a predetermined amount of gold content. Gold bars are popular because investment-grade bars must be at least 99.5% gold. Therefore, you know what you are buying.

Another option is to buy gold coins produced by countries, like the American Gold Eagle, Canadian Maple Leaf and South African Krugerrands. They also contain set percentage amounts of gold.

If you buy non-standardized jewelry, antique coins or other items, it’s harder to evaluate how much gold is in the item and what it is worth as an investment. At the same time, jewelers charge a premium for creating gold jewelry, so less of your money goes toward the pure investment.

3. Buy from reputable dealers.

While you could try buying gold from a pawn shop or directly from individuals online, there’s more of a risk that you could end up overpaying or even be cheated. Buying gold directly from a dealer, either online or in person, is safer. Be sure to check each dealer’s reputation and history of customer complaints through services like the Better Business Bureau.

When dealers sell gold, they charge a fee above the spot market price called a spread. Some dealers charge a much higher spread and other fees than others. Pull up the fee tables for different companies and compare them before purchasing.

4. Use a precious metal IRA for tax savings.

A precious metal individual retirement account, or IRA, lets you buy and store your retirement savings in physical gold. You then receive the same tax breaks as a regular IRA, such as tax-deferred growth for your gold investment gains. However, in our review of the top Gold IRAs, we found that several companies charge substantial hidden fees that can greatly diminish your retirement savings.

Gold IRAs also pose a substantial risk for fraud. Because you’re not allowed to hold your own physical gold in an IRA, companies charge you to store gold in their facility. Less reputable companies have been known to charge investors for gold that never existed.  Do your due diligence before investing any of your retirement funds with a Gold IRA company.

5. Let someone you trust know about hidden gold.

Hiding gold around your house is generally not a good idea. But if you go this route, let someone you trust know about the investment and hiding place. That way, if you pass away suddenly, your loved ones don’t lose the gold hidden inside a sofa or under a floorboard.

6. Consult with a financial advisor.

Before changing up your investment portfolio, consider meeting with a financial advisor first. They can give you an unbiased opinion of gold as an investment versus the sales pitches you would receive from dealers selling precious metals. Together, you can determine what role, if any, gold should play in your portfolio.