Updated May 27, 2020
The economic crisis has pushed investors to move their money to safer pastures. One common choice is gold, its prices often rising as markets fall. In the past few months, gold prices have been spiking at levels not seen since the 2008 crisis.
So should you invest? Here’s why you should think before switching to gold.
A safe investment?
Gold was long considered a form of currency, before paper (and plastic) took over. The gold standard, which tied the country’s currency to the price of gold, ended in the U.S. in 1971, but gold is still considered a form of wealth.
“There’s always someone who believes you should put everything into gold,” said Dennis Nolte, certified financial planner and vice president of Seacoast Investment Services.
The value of gold is seen as resistant to inflation, so some investors buy gold to hedge against rising prices. Its prices also don’t rise or fall with other types of investments, like stocks and bonds.
“Gold actually went up 2008, during the financial crisis,” said Nolte. “Gold is often seen as a traditional diversifier in bad times.”
Other experts say gold is not always the safe investment it appears to be. While not tied to other types of investments, prices can still be volatile. It can sometimes be impacted by world events.
“Gold moves completely independently of inflation and can lose purchasing power,” said Alexander Vaccarella, certified financial planner and senior vice president at Wealth Enhancement Group.
Supply & demand
Gold is a precious metal — a component of jewelry, coins and other collectibles. Investors buy gold because they view it as a direct investment. To some, gold will always be worth something and hope to take advantage of any future price increases, similar to art or car collections. For some investors, putting money in a tangible asset can be reassuring.
“It’s purely speculation,” said Vaccarella. “Gold gets value simply based on the idea that others will pay for it.”
Other types of investments, like stocks, represent an ownership interest in companies that own assets and generate revenues. Those assets and profits are what gives a stock value (though speculation also plays a role). Its price is based on supply and demand, said Vaccarella. This can make gold a risky investment, as its value is tied up in the perception of its value. If sentiment toward gold changes, your investments could go south.
“In reality, gold has been an awful investment over the past few decades,” said Vaccarella. “A long term price chart for both gold and silver show huge up and down swings with little in the way of long-term appreciation.”
So should you buy gold?
You can invest in gold in a number of ways: buying jewelry or physical gold, purchasing gold certificates or exchange-traded funds and investing in gold mining stocks or gold-mining focused mutual funds.
But individual investors probably shouldn’t solely rely on gold. While owning some gold could provide a small hedge should an economic crisis happen, the best way to protect yourself through turbulent economic times is by diversifying your investments.
Want to get started in investing? Here's a guide.
Image: Phillip Blackowl