As anxiety over a seemingly imminent recession grips investors and analysts worry about a debt ceiling crisis and more bank failures, gold is having a moment.
At the start of May, the price of the ancient commodity is near historic highs, at over $2,000 per ounce. The price is not only buoyed by investor sentiment but a surge in demand from central banks around the world, which bought up gold at record volumes at the start of this year.
As the world’s oldest asset, gold has a lot to offer. Its physical permanence and immutability, combined with its historic role as the ultimate guarantor of the financial system, gives it enduring popularity. It also overperforms during times of turmoil, when confidence is low in traditional systems. So is this the time to buy a few bullions?
This article will look at the bull case for gold in 2023, consider some input from financial experts about how much weight the metal should have in your portfolio, and some of the best ways to get exposure to this asset.
The Great Stabilizer
Historically, gold has been the resource that underpins most monetary systems. In pre-modern times, it was common for coins to actually contain small traces of gold.
For most of the 20th Century, gold acted as a reserve asset, guaranteeing the value of global currencies. Still, today, when other more liquid mediums of exchange lose their value, gold inevitably rises.
In desperate times, people tend to lean into this so-called “asset of last resort.”
“Gold is like a superhero, saving people from inflation and currency risk for thousands of years. It’s like a shield that protects your portfolio from market volatility and uncertainty,” Jorey Bernstein, Founder and CEO of Bernstein Investment Consultants.
Gold can be bought in various forms, from physical pieces to market-based securities which are tied to gold’s price.
“The kinds of gold assets you should consider depend on your investment goals and risk tolerance,” Bernstein says. “Some options include physical gold (bullion or coins), gold stocks (shares of gold mining companies), and gold exchange-traded funds (ETFs). It’s like choosing between a classic car, a race car, or a car that can transform into a robot.”
“In my opinion, it’s perfectly acceptable to have savings in physical gold, so long as you have a secure place to store it,” says Christine Luken, Financial Dignity Coach.
“My husband and I prefer gold coins to gold securities. However, I consider gold to be another form of currency for our savings, and not necessarily an investment that’s going to get me a huge return.”
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Special Properties
The same unique properties that make gold valuable also limit it as an asset.
It is ideal as a store of value because it is non-perishable. It is not used up when it is consumed, unlike, say, crude oil or wheat, and because it can be constantly melted into new forms, gold never really disappears. Thus, regardless of demand, as long as it is continued to be mined, the supply of gold continues to increase over time, which can weigh down on its value.
While it is certainly stable, it is not a growth asset, for it does not actively generate a profit like a productive business or innovative technology. Hence, unlike stocks or even real estate investment trusts, gold itself does not pay dividends. For this reason, some caution against buying gold, even when it appears in vogue to do so.
“I would advise my clients not to buy gold – not now, not ever,” says David A. Fowler, founder of High Mountain Financial Coaching. “Over the long run gold as an investment only has bond level rates of return but stock market levels of risk. A more risk-averse investor is better served buying bonds, likewise an investor willing to take on more risk should consider equities over gold.”
Shiny, but Useful?
Some advisors suggest looking beyond gold to consider other metals that are not just used mainly in jewelry but serve other functions in the economy.
“Silver and other precious metals can also be an investment option,” says Bernstein. “Platinum and palladium, are like sidekicks that have their own unique superpowers. Platinum is used in automobile catalytic converters, while palladium is used in electronics manufacturing.”
The decision to buy gold must be weighed up, and will depend on the preferences and goals of each individual investor.
For risk-averse investors, it may make a lot of sense, especially to those who are skeptical of the staying power of the US dollar as the world’s reserve currency.
It is important investors consider the drawbacks, as well as merits of investing in gold, and, when needed, consult a financial advisor on how to design the best allocation for their portfolio.
About the author
Contributing Writer, Wealthtender
Liam Gibson is a Taiwan-based freelance journalist who covers tech, geopolitics, and finance. He has written for Al Jazeera, Nikkei Asia Review, South China Morning Post, Straits Times, National Interest, and has appeared in Fortune Magazine, and several other international media outlets.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
Frequently Asked Questions
What are the main ways to invest in gold?
Investors can buy physical gold such as coins and bars, buy shares of gold mining companies, or buy exchange-traded funds that track the price of gold or hold gold-related stocks. Physical gold comes with storage and insurance considerations, while mining stocks add company-specific risk on top of the gold price. Funds offer convenience and liquidity but charge ongoing expenses.
How is gold taxed when you sell it?
The IRS treats physical gold such as coins and bullion as a collectible, and net long-term capital gains on collectibles are taxed at a maximum rate of 28%, higher than the top rate on most stocks. Some exchange-traded products that hold physical gold can receive the same treatment, so check a fund’s tax disclosures before buying. A tax professional can help if you are selling a large position.
Does gold pay dividends or interest?
No. Gold produces no income, so any return comes only from changes in its price. That is one reason some advisors view gold as a store of value or diversifier rather than a core growth investment. Gold mining stocks and some funds may pay dividends, but those come from the companies, not from the metal.
How much of a portfolio should be in gold?
There is no universal answer. The right amount depends on your goals, time horizon, risk tolerance and what else you own, and the experts quoted in this article disagree on whether gold belongs in a portfolio at all. Many investors who hold gold treat it as a small diversifying position rather than a core holding. A financial advisor can help you decide whether it fits your plan.