Four Things to Know About Gold
All investors should have an allocation to gold. Here are four key reasons:
1. Gold is largely uncorrelated to stocks and other investments.
When traditional assets take a tumble, gold tends to rally. And that makes gold a perfect hedge against loss in times of financial downturn.
2. Gold has no exposure to counterparty risk.
Gold is an asset that is not simultaneously someone else’s liability. By owning gold, you don’t depend on a bank, a government, or a brokerage firm. When you own gold, you own it outright.
This is a big advantage over paper assets like stocks, bonds, and ETFs, all of which require another party to make good on a contract. In case our financial system collapses, investments in paper assets will be at high risk.
Gold protects against financial turmoil like no other asset.
3. Gold is a safe haven in worst-case scenarios.
Unlike paper assets, gold is a tangible monetary investment with intrinsic value. This metal has been valuable and universally recognized for millennia.
With central banks devaluating and manipulating fiat currencies, the benefit of holding a sufficient amount of tangible assets like gold is obvious. And while we hope this scenario never happens, gold as well as other precious metals can be used as a currency if fiat currencies ever collapse.
4. In addition to being a hedge, gold can deliver decent capital gains.
Gold is also a good long-term investment in addition to being a perfect store of value. The metal’s value has steadily increased over time and has never gone to zero. Take a look at the chart below, which shows how gold’s price spiked in the last 30 years.
Comparing Gold to Silver, Platinum, and Palladium
All precious metals have intrinsic financial traits and offer a level of wealth protection that no other asset class can provide. However, each metal—gold, silver, platinum, and palladium—has its own advantages and disadvantages as an investment.
Here are the pros and cons of gold in comparison to other precious metals:
The pros of gold
- Gold’s price is relatively stable compared to other precious metals, especially silver. The metal has also been trending higher for decades.
- Gold is very liquid, and so you’ll always be able to sell it.
- Gold has the biggest investment demand among precious metals, from both central banks and individual investors. And in volatile times, gold demand only grows.
The cons of gold
- Industrial demand for gold is not as strong as for silver, platinum, and palladium.
- If paper currencies collapse, it would be hard to make everyday purchases with bars or coins worth $1,000 or more.
- Fractional coins, such as 0.25 ounce or 0.1 ounce gold coins, can be used for small purchases, but they generally come with large premiums.
The key takeaway is that gold belongs in every portfolio as a store of value and wealth insurance. It is a tangible asset with intrinsic value that is highly liquid and is not correlated to stocks. Furthermore, its price has grown steadily for decades.
Gold is a must-have asset for every portfolio and should make up the largest portion of your precious metals allocation.
How Much Gold to Buy
The rule of thumb is that gold should make up 5%–10% of your portfolio.
However, exactly how much gold to own is each investor’s personal choice. Before you make a decision, remember that there are three primary benefits of gold ownership to consider:
- Risk reduction. Gold is an uncorrelated asset to the stock market. When stocks fall, gold tends to rise.
- Long-term store of value. Gold has lasted—and most importantly, retained its value—for centuries. Some of the stocks you own now probably won’t be around in 20 or more years. Gold will.
- Crisis insurance. Gold protects you against turmoil or crisis like no other asset. Think about all the threats to your wealth: inflation, recession, depression, bank failure, debt implosions, terrorism, and credit defaults. Some of them will happen in your lifetime for sure—and being prepared is the key to prosperity.
So, your gold allocation depends on how much of these benefits you want or need.
In any case, don’t put all your money into gold. On the other hand, know that one gold bar won’t save you if all hell breaks loose in the financial system.
Like any other investment, gold isn’t a sure thing, but history shows it’s the best hedge against financial crises.
What Type of Gold Is Best as an Investment
The variety of gold products can leave even a professional investor confused. In fact, one of the most common questions we get from our customers is what type of gold bullion they should buy.
It’s important to understand that there’s no one-size-fits-all bullion product. Each type of gold has its own pros and cons that you should weigh yourself.
Gold sovereign coins. This refers to gold coins like Canadian Maple Leaf or American Gold Eagle that are minted by sovereign governments. They have legal tender value with global recognition and guaranteed weight and purity.
Best for: All portfolios, especially those held by investors new to the precious metals market. Sovereign gold coins offer investors good value for the money, high liquidity, and potentially bigger premiums upon sale. As they come in different sizes (or denominations), they can also act as a substitute for paper money in case of the fiat system collapse.
Gold bullion bars. Bars are available in two categories: smaller fixed-weight manufactured bars ( 1 oz, 10 oz, 1 kg) and larger variable-weight casted bars (100 oz and 400 oz). Smaller bars offer more competitive premiums than coins and are very liquid. However, they are not as liquid and recognizable as sovereign coins. Larger bars allow you to get the lowest premium available but require very large non-divisible investments.
One way to maintain the liquidity of bullion bars is to use buy-and-store programs. In these programs, your bullion stays within the chain of custody and doesn’t have to be assayed upon sale. Learn about the Hard Assets Alliance’s buy-and-store program here.
Best for: Investors who have a sufficient amount of gold bullion in liquid sovereign coins and want to buy larger amounts of investment-grade bullion at a lower premium.
Gold rounds and commemorative coins. This refers to gold coins that are produced by private mints. Unlike sovereign coins, these coins have no legal tender value. They sometimes come with lower premiums, but their resale value will be much lower. Coins other than sovereign coins are not generally good investments. Investors are much better off buying cheaper bars from well-established refiners.
Best for: Not recommended, except for buyers who want pretty coins with a variety of designs.