We’ve been getting phone calls from clients asking whether they should invest in gold. We’re not surprised because over the past several months, gold has been appreciating in value. The more a commodity goes up, the more people talk about it. The more you hear news about it because it gets exciting. When that happens, people often feel like they’re missing out, and they want to participate in the excitement.
This isn’t the first time gold or other precious metals have been in the news. We’ve had clients talking about this investment going back to 2010 because many people were looking for a more reliable investment coming out of the financial crisis of 2007–09. There was a lot of fear about the markets, and many people perceived gold as safe.
However, in general, the more people buy any type of investment, the more the price will go up. If the price is going up, people want to hold onto that security. If they decide to sell it, they’re going to want a higher price. The demand drives prices up.
As we began 2010, gold was a hot topic among investors. And for the next 10 years, the gold sell-off basically corrected. In 2020, interest in gold came back because the COVID pandemic instilled fear in people again. And then, all of a sudden, Americans were receiving stimulus checks, so people had more money to invest. Many chose to invest in gold.
Should you invest in gold?
In the second half of 2024, we’ve seen gold spike again. Why is that? Again, it has to do with fear. This time, people are feeling uncertain about the elections, inflation, interest rates and global wars. Again, clients are asking, “Should I invest in gold?”
With any investment, the answer to that question is, “It depends.” It depends on your personal situation. What’s right for someone else might not be right for you.
We urge you to meet with your financial advisor to discuss the pros and cons of investing in gold. Please use caution! When something goes up in value 50 percent in a year, going out to buy it probably isn’t a good idea because you might be just locking in someone else’s game.
What we’ve found is that, whether it’s gold, oil, cryptocurrencies, real estate or some other investment, when everybody chases after that commodity, it runs the price up, and then that price gets locked in. Buying high often ends up hurting you, and it ends up not being the safe investment you anticipated.
This phenomenon is nothing new. Maybe you’ve heard about the Dutch tulip-bulb market bubble referred to as “tulipmania.” It occurred in Holland during the early to mid-1600s, when speculation drove the value of tulip bulbs to extremes. The rarest tulip bulbs traded for as much as six times the average person’s annual salary at the market’s peak. It was one of the most famous market bubbles and crashes of all time, and it is a classic example of the potential pitfalls of excessive greed and speculation in investing.
Pros and cons of investing in gold
To give you a bit more background, let’s look at a few of the pros and cons of investing in gold. With any investment, there will be upsides and downsides. Being aware of them can help you decide how, or whether, to proceed with an investment.
Some of the pros
- Protection against market downturns. Those who want to invest in gold are correct that 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 percent between 2008 and 2012, the height of the financial crisis. While nearly all other assets lost money, demand for gold grew because of its perceived reputation for safety.
- Extra portfolio diversification. As always, portfolio diversification can protect you against downturns in certain markets because you’re spreading the value of your portfolio across different types of assets. This allows you to minimize losses because it’s unlikely that every asset will suffer from the same market conditions. In theory, the more diversification, the better. If you add gold to your portfolio beyond traditional stocks and bonds, that increases your diversification.
- Potential price growth. Gold isn’t known for fast-paced price growth. However, recent movement in the price of the commodity has been an exception to that rule. In fact, the price of gold recently went on a record run. Although gold’s price has cooled since then, that cooling may present an opportunity to buy low and sell at a quick, higher profit.
Some of the cons
- Volatility. Gold and other precious metals are highly volatile as investments.
- Costs. Investing in gold can come with storage costs (in the case of tangible assets like gold coins and bars), capital gains taxes and a potential performance lag in your portfolio. If you are a novice investor, using complex instruments such as futures and swaps also exposes you to a bigger potential risk of loss. And, as is the case with any investment, past performance of gold as an investment is no guarantee that its value will grow within your portfolio.
- Potential for fraud. Like other commodities, precious metal prices rise as demand goes up, so when economic anxiety or instability is high, the people who typically profit from precious metals are the sellers. Premiums, fees and commissions can also drain the profit from your purchase. If you finance your purchase and do not physically receive the metal, check to see if the seller or firm is registered with the National Futures Association. If they are not registered, they are likely breaking the law, and you should submit a tip to the CFTC right away.
In 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act effectively banned most over-the-counter retail contracts involving gold, silver and other metals. No commercial entities are allowed to enter into off-exchange commodity transactions using loans or margin. However, the law doesn’t apply to metals transactions that result in physical delivery within 28 days of the purchase. Also, firms that sell and deliver precious metals to retail customers within 28 days do not have to be registered with securities regulators.
You can typically invest in gold safely through exchange-traded funds (ETFs), stocks in gold mining firms and associated companies, and physical coins or bullion.
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We encourage you to avoid getting caught up in any investment that’s doing really, really well in the moment. Instead of chasing performance, we urge you, instead, to trust the customized financial plan we have designed for you and to view investing as a long-term game.
