Gold is a popular investment during tough economic conditions, particularly during periods of high inflation. However, as the price of gold is dependent upon other factors, its market value can be erratic. Because of this, some advisers consider gold to be more like insurance than an investment.
There are several ways to invest in gold. One way is to buy gold bars and coins, called bullion. The price-per-ounce of gold is tracked during daily trading on the commodities market and can be influenced by supply and demand factors. As gold is a commodity, investors can purchase futures contracts that allow them to speculate on gold’s price at a point of time in the future. One way to invest in the value of gold without purchasing the metal is to buy stock in companies that mine gold. The share price of these companies often rise when gold’s value goes up. Investors can also choose from gold-focused mutual funds or exchange-traded funds, which can pool various gold-related investment into a portfolio that includes a stockpile of physical gold bullion.
With stocks, an investor buys a piece of ownership of a corporation, because they believe the company will grow. With bonds, an investor is buying a piece of a loan that a corporation or government entity uses to fund projects or operations. In both cases, the investor is putting money into operations that can spur economic growth. However, buying gold bullion isn’t an investment in any form of business operation. Gold won’t launch a new product or increase its earnings. Its value can grow relative to the value of the dollar, but as an investment, the metal itself can do nothing to boost its price and its value is almost entirely reliant upon other factors.
Gold Spot Price
Gold’s price generally relates to the U.S. dollar’s value and investors will often hold gold in their portfolio as a balance against the dollar’s value. When the government runs high budget deficits, the risk of inflation grows, which can lower the dollar’s value. Gold can hold its value through a variety of economic conditions, but its spot price is erratic. As a result, attempting to trade gold like stocks can be costly. By holding gold, an investor can have insurance in their portfolio in case of economic downturn, serving more like insurance than a growth investment.
Determining how gold will perform can be tricky. As gold performs better during poor economies, it would prove most valuable during times of extreme distress, such as runaway inflation, a collapse in the banking system, war or revolution. While possible, the doomsday scenario where gold would prove most valuable is unlikely, and an over-sized investment in gold generally reflects an extreme pessimism in the financial markets. Most analysts recommend limiting the amount of gold an investor holds in their portfolio to five percent or less.
Terry Lane has been a journalist and writer since 1997. He has both covered, and worked for, members of Congress and has helped legislators and executives publish op-eds in the “Wall Street Journal,” “National Journal” and “Politico." He earned a Bachelor of Science in journalism from the University of Florida.