This question can be one that sometimes goes deeper than an investment strategy consideration. But from an investment standpoint, there are several factors to consider.
Gold and other precious metals do provide diversification to your portfolio. However, due to the reasons below, you would want to proceed with caution.
There are many different ways to invest in gold and precious metals – coins or bars; precious metal mutual funds; certificates; gold and metals futures; and stock in mining companies. Just be sure you don’t buy extra stock in mining companies if you already hold them in one of your mutual funds.
What you need to consider
The market for these metals is like other markets. The price of the metals reflects investor thoughts about the future demand for these metals. For example, investors who expect inflation to increase will buy gold as a hedge, and the market price increases.
As with other commodities, gold and precious metal prices are volatile. This means the price can fluctuate significantly over short periods, with the price of gold being more volatile than that of other commodities.
However, over long periods, gold has not provided returns that exceed those of a balanced portfolio. Over the past twenty years, the price of gold increased 3.9% annually. During the same time period, a balanced, diversified portfolio of 60% stocks and 40% bonds would have returned over 8% annually.
It’s true that the price of gold often doesn’t follow the price movements of the S&P 500 Index (large companies in the US). For example, if there is downward movement in the S&P 500 Index, there is a smaller upward movement in the price of gold. This means that gold provides only a slight diversification benefit when added to a stock portfolio.
Another disadvantage of precious metals is they only increase in value when the price per ounce increases – contrast that to stocks and bonds which often also pay dividends or interest.
If you are concerned about future inflation, you might want to consider the inflation protection provided by other investments such as stocks, Treasury inflation-protected bonds (TIPS), and short-term bonds.
Before investing in gold or other precious metals, you should carefully consider all of these factors.
What we recommend
While every investor’s situation is different, we do not recommend that gold and precious metals replace any of the stock or bond funds which are part of our existing investment allocations. Gold and other precious metals do not provide the long-term benefits of stocks and bonds. Also, these precious metals have greater volatility than a portfolio of stocks and bonds. Because of these reasons, gold and other precious metals have limited long-term benefits for investors.