The price of gold is hitting record-breaking highs in the midst of economic uncertainty as investors search for alternative assets.
If the 2020 Summer Olympics could have happened this summer, the event might have relieved some of the anxiety of this year. Even if you have never heard of artistic swimming or dressage, seeing the optimism of the athletes competing for their country can feel uplifting.
Unfortunately, due to the danger of public gatherings during the COVID-19 pandemic, the world’s best athletes lost their chance to compete this year.
Originally, the International Olympic Committee had scheduled the event for July 25 to August 9. Although the Olympians didn’t have their chance to go for the gold during that time, gold itself is still breaking records; on August 4, the price of gold hit $2,000 an ounce for the first time in history (before inflation).
Historically, as the economy faces uncertainty, investors turn to gold. Since many consider the precious metal a traditional safe haven, the price of gold is up nearly 32 percent as of the publication of this article. While these numbers indicate many are looking for a stable investment, other investors suggest there are limited opportunities when investing in gold.
WAYS TO INVEST IN GOLD
Unlike eager prospectors during a 19th century gold rush, there are more ways to own gold than panning through dirt. There are three main ways investors can purchase gold:
- Physical gold: Buying bullion means buying pure, physical gold in the form of bars or coins. Investors can purchase bullion at banks or reputable online retailers, but be sure to verify if the retailer is an authorized dealer. Investors may also purchase gold jewelry.
- ETFs/ETCs: Exchange-traded funds (ETFs) and exchange-traded commodities (ETCs) allow you to track the underlying price of gold without having to physically store it. This means these kinds of investments avoid the extra costs of storage and insurance. Some examples include SPDR Gold Shares (GLD) and Direxion Daily Junior Gold Miners Index Bull 3X Shares (JNUG).
- Gold-related stocks: Mining companies, producers, and other companies associated with gold are a more indirect way to invest in gold. Some examples include Caledonia Mining Corp. (NYSE: CMCL), Barrick Gold Corp. (ABX.TO), and Kinross Gold Corp. (KGC). However, these companies are vulnerable to the stock market, meaning they are less stable than physical gold and present a higher risk.
Other ways to invest in gold include gold-backed cryptocurrencies, foreign exchange trades, or gold futures.
AT THE END OF THE RAINBOW
One of the main attractions of buying gold is the perception that it is a safe haven during periods of market turmoil. Gold acts as a hedge against inflation because as the U.S. dollar loses value due to inflation, the price of gold tends to rise.
As a finite resource, the price of gold tends to be more stable; its value is not impacted by interest rate decisions made by a government or the performance of other industries of stock.
Because gold tends to have an inverse relationship to the dollar, the price of gold complements other assets in an investor’s portfolio. If other assets crash during an economic depression or a stock market crash, this precious metal can diversify a portfolio and balance the other assets.
THE KING MIDAS CURSE
Although investors view gold as a safe haven, with a low risk comes a low reward. For example, if you could go back 200 years and invest $10,000, your assets would have remarkably different results. In real, inflation-adjusted terms, here is what those $10,000 would have given you:
- $26,000 if you had invested in gold
- $8 million if you had invested in bonds
- $5.6 billion if you had invested in stocks
Another disadvantage of investing in gold as opposed to other assets is that it doesn’t generate passive income. Unlike property ownership or shares, there is no cash flow, meaning gold only earns money for investors when they sell it. And since gold does not have an inherently increasing value, there is no guarantee how much price appreciation potential gold might have.
Finally, purchasing gold can come with extra fees. Dealer fees, storage (such as a safe deposit box or renting an offsite storage unit), and insurance can add to the initial cost. Furthermore, the IRS taxes gold as a collectible, meaning investors must pay capital gains tax if they sell their gold for a profit.
One way to offset the strengths and weaknesses of any one asset is to diversify your portfolio. Whenever the markets are as unpredictable as an underdog winning an Olympic medal, a balanced approach to investment may help.