Gold is deeply ingrained into our minds as a sentiment of wealth, luxury, and prosperity in the way diamonds or pearls are. Thousands of years ago, gold was enough to wage war over. Nowadays, investors buy gold as a hedger for political turmoil and inflation rates. With a current market value of $1,979.31, recorded March 8, 2022, gold has far from faltered in value. Below, we’ll look at the things anyone needs to consider before investing in gold.
Gold Is Subject To Short-Term Volatility
Gold is heavily influenced by geopolitical factors, interest rates, supply and demand, and monetary policies controlled by the federal reserve. Investors who trade gold – either physical or stocks – and use it to build a diversified portfolio find themselves subjected to short-term volatility and, more often than not, long-term gains, especially with gold stocks.
Gold Stocks Are Different To Physical Gold
Physical gold like bullion coins and bars is a physical commodity that comes with collectible and storage fees. It extracts 100% of its returns from fluctuations in its price.
Gold stocks are similar to any other company stock, except for fluctuations in the value of gold, and the normal stock market indicators, influence the rise and fall of its value.
Investors that like the idea of exposure to gold without having the physical commodity should explore investments into gold mining companies like Barrick Gold Corp (GOLD) or Franco-Nevada Corp (FNV). Gold stocks are more likely to be a good investment asset that’ll form part of a diversified portfolio because the company’s success also influences the increase of the stock prices, rather than just relying on the value of gold per ounce.
Expect Inconsistent Returns
Stocks pay investors dividends, and bonds produce interest payments – physical gold doesn’t come with the same promises. That’s why trading gold stocks like Barrick Gold Corp comes with advantages – mining companies produce goods or services that investors find valuable.
Physical gold has long experienced periods of underperformance. Investing in companies that could potentially expand production and reduce mining costs – especially in the current geopolitical times of crisis – can yield higher total returns.
Similarly, as financial and political unrest settles, investors might experience a decline in the value of both physical gold and stocks, thus creating inconsistent returns.
Stocks, Bonds, and Gold Should Makeup A Diversified Portfolio
Including precious metals like gold in a portfolio with stocks and bonds creates a diversified portfolio with commodities ready to offset each other. Experts recommend that gold make up no more than 10% of a portfolio. There are three options of gold stocks to explore:
- Gold Exchange-Traded Funds (EFTs): EFTs are assets backed by gold that typically mimics the price of gold. They’re perfect for any investor who doesn’t want to deal with precious metals IRA needed for storing physical gold.
- Gold Mining Stocks: These stocks allow investors to buy into companies that mine gold, meaning they often mimic the general price of gold. Stocks are subject to fluctuations experienced by the business, as with any other company stock.
- Gold Certificates: They’re technically not stocks, but they represent an investment in gold. Essentially, a piece of paper confirms that you own gold without physically having it. Gold certificates aren’t as popular since the US dollar isn’t backed by gold anymore.
The most direct access to owning gold is to purchase gold bars and coins, but these are illiquid. Gold mining stocks and EFTs come with liquidity, are a ‘safe haven’ to retreat to, and create portfolio diversification. Always be mindful when diving into gold investments and consider how they’ll benefit the rest of your portfolio.