Is Gold a Good Investment?

Should You Invest In Gold?

Gold is best used as a supplemental asset rather than a foundational one. The more essential financial moves are maxing out your employer's 401(k) match, contributing to an individual retirement account (IRA) and building a diversified portfolio of low-cost index mutual funds or exchange-traded funds (ETFs).

That said, gold can play a role for some investors. It's historically shown low correlation to stocks and bonds. In fact, gold has outperformed stocks in six of the eight U.S. recessions since 1973 by an average of 37%.

"During times when people lose faith in the dollar or inflation becomes rampant, they turn to gold," says Eric Croak, a certified financial planner and president of Croak Capital. "It is one of the few assets that can appreciate when everything else is depreciating."

Still, over longer stretches, gold's returns have lagged behind the stock market. Over the past 100 years, gold has yielded an average annual return of about 2.1%, compared to roughly 7.3% for the Dow Jones Industrial Average over the same period.

Pros and Cons of Investing in Gold

Investing in gold comes with real benefits and meaningful drawbacks. Here's a breakdown of what you should consider as you consider adding gold to your portfolio.

How to Invest in Gold

There are several ways to gain exposure to gold, but each one comes with its own set of tradeoffs. Here's a look at your options.

Physical Gold

Buying gold bars or coins means you own the metal directly. You can purchase physical gold from dealers, some international banks or online retailers. It's the most direct form of ownership but also the most logistically demanding.

Physical gold comes with markup over the spot price (market price) plus ongoing costs for secure storage and insurance. However, there are some distinct advantages.

"There's no counterparty risk like you get with a gold ETF," says Croak. "Yes, it tracks the price of gold, but now you're paying an expense ratio each year."

Gold ETFs and Mutual Funds

Gold ETFs are one of the most accessible ways to invest in gold. ETFs that hold physical gold seek to track the spot price of gold. Shares can be bought and sold through a standard brokerage account, just like a stock.

Gold mutual funds may hold a basket of gold-related assets, including mining company stocks. It's crucial to note that some gold funds that hold physical bullion are taxed as collectibles in the U.S., which carries a higher maximum capital gains rate than long-term stock gains. These funds are called exchange-traded products (ETPs).

Gold Mining Stocks

Investors can also buy shares in companies that mine and produce gold in addition to the precious metal itself. Mining stock prices are influenced by the price of gold but also by company-specific factors such as operating costs and production levels. This means they don't offer direct exposure to gold's price.

Gold Futures

Gold futures are contracts to buy or sell a set amount of gold at a specific price and date. These are complex instruments that carry significant risk. As such, they're generally not appropriate for novice investors.

Frequently Asked Questions

The Bottom Line

Gold can play a real role in a portfolio. It tends to hold its value over the long haul, often moves independently of stocks and bonds, and has historically helped soften the blow during market downturns.

But for most investors—especially those just starting out—the more important moves are more fundamental: Capture your employer's 401(k) match, build a diversified portfolio of low-cost funds and eliminate high-interest debt. These steps offer more predictable long-term returns than any commodity.