With the U.S. officially in a recession and a volatile stock market, some investors may see gold as a way to hedge against economic uncertainty. As with any investment, however, before you buy, investors should do their research and know what they’re purchasing.
Investors may look to add gold to their portfolio because, according to a 2019 article on the Motley Fool investment website, the metal can offer positive returns when the rest of the market is struggling. However, this is only the case if gold is used as part of a larger, diversified investment plan.
Gold’s valuation can vary widely and can change quickly. Its use in jewelry accounts for about half of the gold demand, 40 percent of the demand is its use as an investment, and the remainder is for industrial use, according to the Motley Fool article.
However, since 1971, gold averaged a 10.6 percent annual return, according to information from the World Gold Council. Portfolio allocation analysis found that investors who hold between two to 10 percent of gold in their portfolio can significantly improve their portfolio’s performance, according to the World Gold Council.
According to the World Gold Council, small bars and gold coins account for about two-thirds of the annual investment gold demand, and the demand for bars and coins has quadrupled since the early 2000s. Gold exchange-traded funds and exchange-traded commodities account for about one-third of the investment gold demand.
Investors looking to add gold to their investment plan have several options. Small bars and gold coins account for about two-thirds of the annual investment gold demand, and the demand for bars and coins has quadrupled since the early 2000s, information on the World Gold Council website stated.
Gold can also be purchased in the forms of gold stocks and funds, bullion, and collectible coins, according to information from the Federal Trade Commission. Stocks and funds may have more liquidity than gold, the FTC stated, but stocks or funds may decrease in value, regardless of whether the price in gold drops.
Bullion is a bulk quantity of precious metals and bullion coins are made from precious metals and kept as an investment, according to FTC information. The price of bullion coins changes depending on the prices of precious metals and can fluctuate throughout the day. Collectible coins, unlike bullion coins, have historic or aesthetic value. Bullion coins’ value comes from its precious metal.
The FTC recommended only purchasing gold stocks and funds from licensed commodity brokers. For purchasing bullion or collectible coins, the FTC recommended consulting with a financial advisor or reputable dealer, getting an independent appraisal, and asking for the item’s melt value. The melt value is the value of the metal in the coin if it was melted and sold. Investors can also request a certificate of authenticity for the coin’s metal content. Investors can consider purchasing coins from the U.S. Mint, which guarantees the precious metal content for the gold, silver, and platinum bullion coins it produces. When buying coins, it is important to also consider costs such as buying insurance or a safety deposit box, for the investment.
As with any investment, a return is not guaranteed, and investors should thoroughly research an investment before purchasing it. When done correctly, however, gold may be a smart way to help diversify an investment portfolio and guard against market downturns.