Is buying gold a good investment?
That depends on who you ask. Some argue commodities like gold and silver are too risky and don't offer enough utility as investments, while others argue they can help round out a diversified long-term portfolio.
Many people rush to gold in tough times. The shiny metal has remained valuable since the start of recorded history and it tends to hold up well during stock market crashes and periods of high inflation.
Famed investor Warren Buffett has been somewhat ambivalent about gold over the years.
“I have no views as to where (gold) will be (in the next five years), but the one thing I can tell you is it won’t do anything between now and then except look at you,” he told CNBC in 2009.
“Whereas, you know, Coca-Cola will be making money ... It’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage."
Buffett shocked his many followers in 2020 when his company Berkshire Hathaway actually picked up shares of gold mining company Barrick Gold — but he sold them all the following year.
How to make money with gold
You have a few options here: You can either buy physical gold like bars or gold coins, invest in gold mining company stocks or a gold exchange-traded fund, or ETF, or buy into gold futures.
1. Buy gold bullion or coins
The most straightforward way to put your money in gold is to buy and store gold bars, coins or jewelry.
To actually make a profit off the precious metal, you need to have a reasonable expectation that your gold can be sold for more than you paid for it. Unfortunately, gold prices are notoriously difficult to predict.
In the 1990s, gold barely hit $300 on a good day. Then, as financial and political crises loomed in the mid-2000s, people did what they always do and started buying up gold, which drove up gold prices.
Its value more than doubled from $800 an ounce in 2009 to $1,900 in 2011. But by 2013, the bubble had burst and gold was down to $1,300.
Then in the summer of 2020, during the stress and uncertainty of the pandemic, gold briefly surged to an all-time high of $2,000 an ounce before sinking back down once again.
If gold forms part of your retirement plan, you can actually buy it through a gold individual retirement account, or IRA. That said, you’ll need to set it up with a special custodian or broker, and you may face unpleasant fees to cover the cost of storing the metal.
2. Invest in gold stocks
You can invest in gold without ever touching a flake of it by purchasing shares of gold mining companies on the stock market.
The advantage is that if the price of gold suddenly plummets, you may not lose your shirt because the mining company could decide to focus on another metal.
The disadvantage of owning mining stocks is that they can decline with the rest of the market, even when the value of gold is steady. In fact, business factors can always come into play — factors like the company’s financials, the quality of its management team and long-term production prospects.
You can easily invest in commodity stocks through any number of investing apps — although a few will give you a free stock just for signing up.
3. Put money into gold ETFs
Investors might buy into gold exchange-traded funds to avoid the uncertainty that comes with investing in a particular company.
Put simply, these funds are pools of money from investors that are poured into a variety of gold and mining companies. ETFs are traded like stocks; some of the most popular gold ETFs are GLD, GDX and GDXJ.
You will have to be prepared to lose a certain percentage of your investment’s value every year to the fund’s expense ratio. For example, with the largest gold ETF, SPDR Gold Shares, you’ll be charged 0.40% of your investment’s value each year.
Still, ETFs as a whole have very low management fees, and you save even more by buying them through a zero-commission investing app.
It’s also important to note that there's still a measure of uncertainty when investing in ETFs. Although these funds are heavily diversified to reduce risk, they are subject to the fluctuations of the stock market.
If the market crashes, the value of your investment could drop even if the value of gold doesn’t change.
4. Buy gold futures
Gold futures are very complicated. They're contracts in which you agree to buy a set amount of gold at a specific price some time in the future.
Traders can strategically buy and sell futures contracts to profit from the changing price of gold.
Buyers of futures contracts profit when commodity prices rise. Sellers of futures contracts profit when commodity prices fall.
The contracts typically require a minimum purchase of 100 ounces of gold. Novice investors should exercise extreme caution with futures contracts due to the high degree of borrowing typically involved.
Next steps: Buying gold as an investment
Before you go King Midas and turn your entire portfolio to gold, take the following precautionary steps:
- Decide your risk tolerance: Investing in gold futures can be risky, while ETFs can help spread out your risk.
- Do your research: If you decide to invest in a specific gold mining company, look into its performance over the last few years and whether it mines for other metals or resources.
- Start slow: Most people who invest in gold make it a small part of a diversified portfolio. Consider a wide range of investments.
- Ask for help: Don’t be shy to ask your financial advisor for input on whether gold would be a good addition.
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