Gold-plated investing strategy? Shiny metal and your portfolio

All that glitters is an alternative investment.

Written byDebbie Carlson

Fact-checked byDan Rosenberg

Updated: Oct. 18, 2024

3d illustration of stacked gold bars or bullion.

Inflation hedge, alternative asset class, or just a precious metal?

For thousands of years, gold has been both a currency and a store of value. Although investing in gold has its pros and cons, it’s easier than ever to add to your portfolio. In addition to owning physical gold coins and bars, you can buy gold exchange-traded funds (ETFs), mining stocks, and futures contracts.

Whether gold (and other precious metals such as silver and platinum) remain relevant in today’s investing world depends on your view. Some see gold as an insurance policy against stock market volatility and a reliable asset during times of severe economic instability. Others see it as a “barbarous relic,” as famed economist John Maynard Keynes put it—no longer useful in an age of cryptocurrencies and offering less chance of returns over time because it pays no interest or dividends.

Key Points

Gold has been used as a medium of exchange for thousands of years.
Gold and other precious metals such as silver and platinum can help diversify a portfolio.
As an inflation hedge, gold has a mixed performance over time.

Gold had brief periods of huge gains in recent decades, but there were also long stretches when it was outperformed by U.S. stocks. For example, anyone who invested in gold in 2011, instead of putting money in stocks, would have gotten crushed over most of the following 10 years as U.S. stocks surged. On the other hand, gold performed well during the COVID-19 pandemic when investors worried how companies would fare during shutdowns.

You’ve probably seen ads on TV hawking gold or silver. Some financial experts suggest precious metals can be part of a diversified portfolio as long as they’re in small amounts of about 5% to 10% of asset allocation. So, should you have gold or other precious metals in your portfolio to protect against inflation or provide diversification? The answer is a firm maybe.

Gold as an alternative investment

Gold is traditionally considered an alternative asset to investments like stocks and bonds, and it can provide diversification. Studies by gold industry group World Gold Council show the yellow metal is correlated to stocks when equity prices are rising, but loses this correlation during periods of market stress.

In other words, gold can sometimes—although not always—rise when stocks fall. That makes it unique from many other assets, and a potential safe haven during times of turmoil.

Also, when inflation rises and reduces the value of stocks and the dollar, investors sometimes embrace gold as a so-called “inflation hedge,” or a protective investment against rising prices.

Gold as an inflation hedge

Gold actually has a mixed record on beating inflation. During the period of high inflation in the 1970s, gold prices surged until the Federal Reserve sharply raised interest rates to tamp down rising prices. Rising rates tend to strengthen the dollar, weighing on gold prices.

During times of more muted inflation, gold hasn’t always outpaced the price of goods and services. Also, investors didn’t get much help from gold during the 2022 global inflation crisis. Gold prices stalled in part because the Fed began dramatically raising rates.

Gold may be a decent store of value over the long term, but how do you define long term? Research by Campbell Harvey, a Duke University finance professor, shows that a centurion (or military commander) in ancient Rome was paid 38 ounces of gold, similar to a U.S. Army captain’s wage in today’s dollars, based on gold’s market price.

How to buy gold and precious metals

There are several ways to invest in gold, each with pros and cons.

Physical gold bars and coins. This is the traditional way to buy gold. Investors can buy through the U.S. Mint or reputable precious metals dealers. Look for dealers who are members of precious metals industry groups such as the Industry Council for Tangible Assets. Investors might want to consider buying gold bullion coins and bars because those prices reflect gold’s daily value and have the lowest dealer markup. Coin collectors may opt for “numismatic” coins, which have a separate market value that considers both the gold price and other qualitative factors such as artistry, supply, or commemoration of an event.

Exchange-traded funds. Investors who want exposure to gold prices but don’t necessarily want to own the physical metal can buy exchange-traded funds, or ETFs. ETFs are traded like stocks on an exchange and can be bought or sold quickly.

Gold futures. Futures are exchange-traded derivative contracts where a buyer and seller agree to transact a specified amount of gold at a set price on a future date. These are highly volatile vehicles that require continuous monitoring. Futures contracts trade in significant sizes that may be out of reach for retail investors.

Gold mining stocks. These are shares in companies that mine metal. This is an indirect way of buying gold, because the stock price reflects a miner’s financial and operating leverage, not just metal values. Although mining stocks can be more volatile than pure metals prices, stocks often pay dividends, giving them a built-in advantage.

Pros and cons of owning gold, silver, and other precious metals

Like any investment, gold has benefits and drawbacks.

Benefits:

Can be considered an insurance policy or a safe haven investment, one that’s less likely to fall in value when stocks tumble.
Can be a store of value over time.
Physical bars and coins can be used as mediums of exchange.

Drawbacks:

Physical gold can be expensive to buy or sell, as it’s subject to dealer premiums.
Physical gold and gold-backed ETFs are subject to a higher tax rate than traditional assets, even when held long term. Gold ETFs can be more costly to own as well.
Gold pays no dividends or interest.

The bottom line

Gold can play a small role in portfolios as a diversifier among other traditional assets, but investing in gold requires you to consider why you want to own it and whether it will help you reach your financial goals.