With the price of gold recently exceeding all time highs, many people are now wondering if they should have gold in their portfolio. The thing you may really want to know is whether you should buy gold right now.
As an investment, gold isn’t all that interesting. It doesn’t pay interest or dividends. There are no quarterly earnings reports. As a currency, it’s thousands of years old.
However, as the genesis of some entertaining investment narratives, it’s … a gold mine. It’s an inflation hedge. Grab some because the government is going to collapse. Why buy gold when you can buy bitcoin instead? What do you think is going to happen to the price of gold as the federal deficit keeps increasing?
It can be confusing to sort truth from myth.
In this article, I’ll discuss reasons why you should or shouldn’t buy gold today. I’ll also share money expert Clark Howard‘s philosophy on buying gold.
Table of Contents
- Step 1: Evaluating Your Current Portfolio
- Step 2: Consider Your Goals
- Factors That May Determine Whether Gold Increases or Decreases in Value
- Clark’s Rules on Buying Gold
Step 1: Evaluating Your Current Portfolio
Should you buy gold right now? It’s much easier to answer that question based on your actual investment portfolio.
While there’s no singular “right” way to build a retirement portfolio, there’s a pretty strong consensus that gold and other precious metals should make up no more than 5% of your total assets — if not less.
“Having 3, 4, 5% of your money in gold or precious metals I think is fine,” Clark says. “Your entire orbit of hedging [beyond stocks and bonds] should never be more than a dime of every dollar you have in investable assets.”
Do you have 5% or more of your portfolio in gold already? If so, you probably shouldn’t buy gold right now.
If gold makes up less than 5% of your portfolio, it doesn’t mean you should rush to buy it immediately. You can consider it, but there could be an opportunity cost.
Step 2: Consider Your Goals
People have many different reasons for wanting to buy gold – some grounded in fundamentals and others not. Here are just some of the reasons people think about considering gold for their portfolio:
- Investment and Inflation Hedge: Gold is widely regarded as a hedge against inflation and currency devaluation. When real returns on bonds, stocks, and real estate are expected to decrease, gold often seems attractive. With respect to inflation, the idea is that gold retains its value while the purchasing power of fiat currencies can diminish due to rising prices. Over the long term, gold has tended to maintain its purchasing power. However, in the short to medium term, its performance can be quite volatile and may not always correlate directly with inflation rates.
- Safe Haven: During periods of political or economic uncertainty, gold is considered a safe haven asset. Investors often buy gold when they lack confidence in the stability of their own currency or the global economic system.
- Diversification: Many investors include gold in their portfolios to diversify their investments and reduce risk. Gold often moves inversely to stock markets and currency values, providing a stabilizing effect when other investments fall in value.
- Wealth Preservation: Families often purchase gold to build and preserve wealth across generations. It is seen as a way to pass on assets that will retain or potentially increase in value over time.
- Physical Tangibility: Unlike digital assets or paper money, gold is a physical commodity that can be stored and held. Some people find security and comfort in owning physical assets.
- Return Potential: While gold can be volatile, it has the potential for high returns, especially during periods of high demand and limited supply.
The Case for Long-Term Diversity
Like any other allocation, the price of gold rises and falls in the long term depending on supply, demand and macroeconomic factors that are all unpredictable.
However, gold has been found in graves that date to earlier than 4,000 B.C. Humans have used gold as a currency for many centuries. Over a timeline of many generations, most people consider gold to be one of the safest investments.
Gold has gone up 81% in the last five years.
In the last 20 years, gold is up 470% (9.1% compounded annually)
It’s a good idea for your portfolio to include more than stocks, bonds and cash. Remember, diversification involves owning assets that aren’t strongly correlated in price. Real estate is a legitimate option, Clark says. He recommends most people invest in a low-cost REIT or ETF.
Crypto has become a popular diversification play in recent years, until the recent crash. But Clark does not particularly like crypto for that purpose.
In small amounts, gold is a Clark-approved way to add diversity to your portfolio.
“Just don’t go too overboard buying it,” Clark says. “Remember, gold is not an investment. Gold is just something to deal with uncertain times and to give more room for your portfolio to deal with when times are bad rather than when times are good.
“Real money is made in the productive capacity of the creative, gutsy individuals and companies here in the United States and around the world who create new value by the ideas, the products and services they offer.”
Factors That May Determine Whether Gold Increases or Decreases in Value
To refer back to the beginning of this article, the narrative that gold is a great hedge for inflation and for times of stock market volatility has taken root.
In the last half-century, more often than not, gold has performed well, at least temporarily, against the stock market during those times. The narrative is a bit self-fulfilling; the more people believe it, the more likely it will be to work.
“It’s the metal we fall back on when other currencies don’t work,” Investopedia writes.
However, the reality of the price of gold isn’t nearly that straightforward.
Here are some other potential factors that can influence the price of gold:
- Strength of the dollar: Gold does well, at least in terms of purchasing power, when the U.S. dollar is weaker. It doesn’t do as well when the dollar is stronger. The dollar is particularly strong at the moment.
- Geopolitical uncertainty: Wars, the potential for global conflict and greater uncertainty around the viability of governments can sometimes boost the price of gold.
- Demand: China and India have been especially fond of buying gold in recent years, highlighting a trend among developing countries. India’s demand tends to peak in October around the country’s wedding season, which can matter to the price of gold.
- Fear in the market: When investors are particularly fearful, gold can look more attractive than usual as a potential safe haven.
- Rising interest rates: When interest rates increase (like the current environment), it can create downward pressure on the price of gold. Rising interest rates can make other options (savings accounts and CDs, for example) attractive competitors.
Clark’s Rules on Buying Gold
Want to go deeper on Clark’s gold-buying philosophy? Check out our recent article here.
Here are Clark’s four rules for buying gold in simplified form:
- Limit your investment to a maximum of 5% of your portfolio.
- Don’t physically hold the gold due to costs, large bid/ask spreads and needing to store it.
- Instead buy through an ETF or ETN with an expense ratio of 0.25% or less (IAU, BAR, SGOL and GLDM are options).
- Check your motivation for buying. Clark isn’t a huge fan of the “gloom and doom” crowd sometimes motivated by conspiracies.
Final Thoughts
If you want to increase your gold holdings to 3-5% of your portfolio for the long term, go for it. Consider dollar-cost averaging for many months, as the price of gold is unpredictable in the short term.
Be careful not to put too much of your portfolio in gold, and to buy via low-cost options like Clark recommends.
Keep in mind that while gold will add some diversity to your portfolio during times of market uncertainty, it shouldn’t be seen as a financial savior. It’s not always clear when and for how long the price of gold will rise.
At this point in the stock market cycle, it’s best to have patience and continue focusing on a long-term, diversified portfolio allocation.
