Thinking about adding gold to your investments? Hold your horses! Before you take the plunge, let’s uncover the pros and cons of investing in gold.
Gold, often called a “crisis commodity,” holds a unique position in the investment world. Its long-term trend has been consistently positive, outperforming most major asset classes over the past two decades. However, like any investment, it carries its share of risks and disadvantages.
Table of Contents:
10 Advantages of Investing in Gold
1. Long-term track record
Gold has stood the test of time as a historical store of value, retaining its purchasing power through centuries. The enduring appeal of gold as a store of wealth is evident in its consistent performance, making it a reliable choice for those looking to preserve their assets.
Gold prices have been volatile in recent years, but the long-term trend is clearly upward. Its prices have been rising in the past and are expected to continue rising in the future. The chart below shows the price of gold from 2015 to 2024.
2. Tangible investment
When you possess gold, you own a tangible asset with intrinsic value, distinct from traditional stocks or bonds. With physical gold, investors enjoy a sense of security and control over their investment, knowing they hold a valuable commodity that has stood the test of time.
The direct possession of gold offers a level of assurance that is unmatched by other types of investments. You can hold and keep it as long as you want, and it will still be worth something in the future.
3. Hedge against inflation
Gold is a reliable hedge against inflation, safeguarding investments during economic crises. When inflation rates rise, investing in gold helps to preserve our purchasing power, as its value tends to increase during inflationary periods. This has been true throughout history and will continue to be true in the future.
Gold is a good asset to hold when stocks and other investments are losing value because its performance is often inversely correlated with interest rates and the strength of the dollar.
4. Hedge against economic uncertainty
Investing in gold provides a safe haven during economic uncertainties and geopolitical tensions. It serves as an effective shield against market volatility. This means that it is an investment that you can turn to when the stock market or other investments are doing poorly.
5. Portfolio Diversification
Diversifying your investment portfolio with gold can help reduce overall risk and enhance long-term returns. Gold can provide stability and balance during market fluctuations because of its low correlation with other assets. Investors allocate a portion of their portfolio to gold for protection in market crashes or crises.
6. Gold is rare and has a limited supply
Gold’s rarity and limited supply make it universally valuable. It’s in demand globally, both for its use in jewelry and as a financial asset. Likewise, new discoveries of significant gold deposits are rare. Furthermore, mining operations often face challenges in increasing gold production. This ensures that the supply remains limited, supporting its value.
7. Potential for capital appreciation
As the demand for gold consistently surpasses its supply, the value of this precious metal tends to increase steadily over time. This trend allows investors to capitalize on long-term capital growth and effectively preserve their wealth.
8. Widely accepted
Gold is widely accepted around the world as a form of currency and a store of value. This means that you can easily convert gold into cash no matter where you are in the world. Always be careful where you sell your physical gold.
9. Central bank buying trend
Central banks around the world are increasingly turning to gold as a reserve asset. According to the World Gold Council, central bank gold reserves have increased by over 1,000 tons for the second consecutive year. The People’s Bank of China was the biggest buyer, while the National Bank of Poland was the second largest gold buyer in 2023.
This trend will likely continue in 2024 and beyond as central banks look for ways to diversify their reserves away from the U.S. dollar.
10. Wealth and status symbol
Gold is one of the most coveted assets among individuals and societies worldwide. From ancient to modern times, possessing gold has been associated with prestige and power. Its enduring role as a status symbol transcends cultures and generations, cementing its place as a tangible representation of wealth and success.
10 Disadvantages of Investing in Gold
1. Volatility in prices
The price of gold can fluctuate significantly. In recent years, it has reached record highs only to fall back down again. While gold is traditionally viewed as a stable long-term investment option, its price is always unpredictable and doesn’t stay bullish or bearish for too long.
2. Theft and fraud
Gold is a valuable commodity, making it a target for theft and fraud. There is always danger attached to valuable things. Gold bars and coins can be stolen, and gold jewelry can be melted down and sold. Fake gold coins and bars can also be a problem in the market.
3. Storage costs
Storing physical gold incurs storage costs that can impact investment returns. Various storage options, such as home safes, bank safe deposit boxes, or third-party vaults, come with associated fees. Storage fees vary based on the chosen method and provider, adding an ongoing expense to holding gold.
Investors opting for home storage face upfront costs for safes or security systems, while bank safe deposit boxes involve annual rental fees. Third-party vaults offer secure storage but entail monthly or annual charges. These expenses reduce the overall profitability of gold investments over time.
4. Limited income potential
Investing in gold does not generate regular income as stocks or bonds do. Gold is primarily a store of value rather than an income-generating asset, making it less attractive for those seeking consistent cash flow from their investments. Compared to dividend-paying stocks or interest-bearing bonds, gold’s income potential is limited.
5. Less liquid
When investors want to sell gold, they often need to find a buyer willing to pay the market price, which can take time. Additionally, verifying the authenticity and purity of gold can further delay transactions. Gold’s physicality makes it less liquid than other assets that can be quickly bought or sold electronically, especially in large quantities.
6. Lack of dividends
Unlike other assets like stocks or bonds, investing in gold does not offer dividends. Dividends are periodic payments to shareholders as a share of the company’s profits. This lack of dividends in gold investments means that investors solely rely on the fluctuation of the gold price for potential returns.
If you want to earn dividends while having exposure to gold investments, you can try gold mining stocks that pay dividend income.
7. Capital gains tax
When you sell gold for a profit, the difference between the purchase price and the selling price is considered a capital gain. This gain is subject to taxation, impacting your overall investment returns.
Strategies to minimize capital gains tax include holding onto your gold for more than one year to qualify for lower long-term capital gains tax rates. Tax-advantaged accounts like Individual Retirement Accounts (IRAs) or 401(k)s can help defer or reduce taxes on your gold investments.
8. High transaction costs
Buying and selling physical gold often involves significant transaction costs, including dealer markups, shipping, and insurance fees.
9. Subject to speculation
Gold prices can be heavily influenced by speculative trading, which can lead to exaggerated price movements and increased volatility. Speculators may buy or sell gold based on short-term market trends or sentiment rather than fundamental factors like supply and demand. This speculative activity can cause rapid price swings that don’t necessarily reflect the actual underlying value of gold.
10. Environmental concerns
Gold mining often causes deforestation, soil erosion, and water pollution. Local communities near gold mines can suffer from habitat destruction and contamination of water sources, which can impact their health and livelihoods.
Whether you want to add gold or not to your portfolio, it is always important to review and re-balance your portfolios to align with your investment goals.
Disclaimer: This article is for information purposes only and should not be taken as professional investment advice or recommendation of a specific asset. Always practice due diligence before investing.
