Folks planning for their retirement years are always trying to protect their portfolio by making sure they have the right balance of assets so that when some assets go down, others maintain their price levels or even increase.
Gold and other precious metals are a great way to add diversity and stability to an investment portfolio. The challenge with something like gold is, that you not only have to allocate to the asset class, but you also need to decide which form you put your money in.
Do you invest in paper gold, like gold mining stocks, or physical gold, like bullion and investment-grade gold coins?
We’ll help you decide on these important points, but we need to add a little disclaimer: none of this is personal investment advice. Consult an experienced professional before making an investment decision, or better yet, do your own research.
Gold historically has been a non-correlated asset. What that means is that its price behaves differently than other more popular assets like stocks and bonds. If there is a downturn in the economy and stocks and bonds take a nosedive, the gold price usually remains steady and even increases in times of political instability.
Now, it’s great that gold is a non-correlated asset, but it’s important not to become a gold bug and go all-in on gold with 100% of your capital. That is not a good idea. A better idea is to be a prudent investor and allocate a portion of your portfolio to gold. A common estimate that you will see is somewhere between 5-10 percent of your portfolio should be allocated to precious metals.
This is a good ballpark with some investors feeling more comfortable with a smaller percentage like five, and other investors preferring a larger concentration.
What is the most popular way to buy gold?
Well, the most popular way to buy gold is gold jewelry, but that is generally not for investment purposes. The best way to buy gold for investment purposes is to buy bullion-grade bars and coins. And if you are really smart you will do this in a tax-protected account like an IRA. This is a common, but a bit complex method and it is best to work with a company that specializes in these specific types of accounts and investment strategies, so you protect your savings and don’t run afoul of the IRS rules. If you’d like to learn more about this type of investing, you might want to read this Goldco review.
There are some downsides to owning physical gold. You have a storage fee if you keep it in a tax shielded IRA account because you must have a custodian hold your gold for you. The upside to physical gold is that it has never in history gone to zero, unlike nearly every stock investment.
Speaking of stocks this is a good time to talk about another way to own gold and that is called paper gold, or gold stocks. Another new and popular label for these types of investment is called digital gold, but that is the same thing because everyone stocks in a trading account, no one receives the actual paper stock certificates anymore, so everything is now digital.
There are many ways you can get exposure to gold with stock investing. You can own a gold ETF (exchange-traded fund), you can buy sovereign gold bonds (bonds issued by a country that are backed by gold deposits), there are many gold mutual funds, and you can directly purchase stocks in gold mining companies, and for the very savvy investor, you can buy shares of a gold royalty company, which is probably the highest ROI way to invest in the yellow metal.
The benefits of these forms of paper gold are that it is easy and you have many different options to invest in. The downside is that these are all forms of I Owe You’s. Gold is the ultimate “bearer” asset, if you have possession of it, you own the value of it. If you own paper gold, you own someone’s liability to you that is based on gold, but it is still an IOU.
Gold Does Not Beat The Return of Stocks Over The Long Term
Most investment advisors will tell you to have very small to zero allocation of your savings to gold. One of the popular reasons is that gold does not produce income in the form of dividends or interest. The advisors will pull out charts that go back for decades showing you how stocks as an asset class beat gold. But they are completely missing the point.
Gold is a form of insurance. Gold is a form of savings. If you pull out those same stock charts but have them scale out to hundreds of years, you’ll see that nearly everything goes to zero at some point. Except for gold, it never goes to zero. Gold always retains value because humans have seen value in gold, across every civilization, for at least 5,000 years.
Your investment advisor is not necessarily wrong when they say that stocks do better than gold over time. But that is only true when everything is stable in the economy and political sectors. If the geopolitical landscape is spiraling out of control, like after the covid crisis, and World War III is on the horizon, then gold has a much better investment thesis.
If the power goes out and the internet goes down, can you sell your gold stocks? Will you be able to get money out of the ATM? Likely not. If you have some gold on hand, then you have value that you can exchange for goods and services. While this might have sounded like a far-fetched scenario 10 years ago, after the covid insanity, anything can and will happen.
Ultimately it comes down to personal preference. How do you feel about the future? How do you feel about the various asset classes that make up your portfolio? How do you feel about risk?
These days more and more investors are realizing the importance of having a significant amount of their savings in real, tangible assets like gold. It is worth checking your investment accounts and seeing if you need to add precious metals, to safeguard your hard earning nest egg.