Is It Good To Buy Gold Now? – Probably It Is, But First Read This
Among the different investment options available, there are always some that shine more than others, and gold is one of them. This asset has been used since ancient times as a means of preserving wealth and even today, gold manages to outperform other more modern assets.
Investors often ask if it is profitable to invest in gold, but the question is wrongly posed since sooner or later, gold ends up being profitable.
The correct question should be, is it good to buy gold now?
In this post, you’ll learn why gold is a good investment now and why it may be a good investment in the future, but you’ll also learn how to determine the right time to buy gold and the best way to do it. Keep reading to the end.
Why you should invest in gold
The main reason to invest in gold is the attribute that people give it as a safe haven asset in times of crisis. It turns out that the price of gold tends to be more stable than other assets, something that has been observed since gold acquired value in the world of finance during the 1800s.
This is because in the long term, the price of gold has increased steadily, as you can see in this historical chart of gold prices.
This has to do with the correlation between the price of gold and the price of the US dollar; when the dollar loses value, the price of gold rises, but the opposite also happens.
Similarly, when governments put too much money into circulation causing excess liquidity – something that can lead to inflation – the price of gold also tends to rise.
In addition to this, gold has value on its own, as it is also used in the electronics industry and in jewelry. This generates a constant demand for this metal and since it’s a non-renewable resource, its price tends to rise.
How gold protects against inflation
As you can see from the chart above, the price of gold was relatively stable before 2008, when the global financial crisis hit. From that moment on its value doubled and continued to rise until it reached current prices.
This occurred because gold tends to hold its value more consistently than currencies or stocks as they lose value in the face of inflation.
Similarly, if the market sees that there are too many dollars in circulation, the value of gold will start to rise as people will look to exchange their money for gold to hedge against inflation.
The amount of gold available in the market in relation to the number of currencies bidding to buy that gold will determine the final price of the precious metal. This can cause gold prices to skyrocket if too many people want to buy it at once.
Since inflation is a cyclical process, investing in gold is profitable in the long run.
Is it good to buy gold now?
Generally speaking, the best time to buy gold is when the stability of the economy is uncertain and you need to diversify your investment portfolio.
For example, if you notice that there is a risk that the value of stocks and other assets may fall for different reasons such as a pandemic (COVID-19 in 2020) or a war (Russia-Ukraine in 2022), factors that can slow down the economy, gold can be a good buy during the initial phases of the market downturn. This behavior is again reflected in the historical graph.
If we were in the 1970s and you had an investment portfolio based on stocks and bonds, gold would be able to give you a real return if your portfolio underperformed due to inflation.
Likewise, in the 2000s – during the Dotcom Bubble – gold was the only asset that provided decent returns in portfolios based on bonds and stocks.
However, it is important to proceed with caution. Having an investment portfolio based 100% on gold involves enormous risk. While gold has performed well in the past in diversified portfolios, like any asset, gold carries risks and it is important to be aware of them.
Is it a good time to invest in gold?
As you already know, gold performs best in times of high inflation, when the dollar loses value or in the face of the possibility of economic stagnation – such as during stock market crashes.
Are we in a similar situation? Yes, there is an existing of high risk of recession depending on the definition.
On the other hand, there are certain times of the year when it is usually more convenient to buy gold. The beginning of the year and summer are usually good times to buy, although this is not a rule set in stone.
We have examples of this in the spike in price in early 2020 due to the pandemic, when the dollar surpassed $2,000 per ounce, and in early 2021 when the Russian invasion of Ukraine took place, which again spiked gold prices up to $2,000.
Is this the right time of year to buy gold? According to the previous rule, no.
Up to this point we are 50/50.
However, for several reasons, the price of gold has been declining in recent months, reaching a certain level of stability, something that many investors often consider a good time to buy gold, especially when they want to diversify in the face of an uncertain economic scenario.
Two points in favor of buying gold and one against.
Now ask yourself the following question:
Do you have a diversified portfolio that can protect you against inflation and a possible economic downturn?
If your answer is no, then you should include some type of physical asset in your portfolio and in my humble opinion, the best physical asset is gold.
Cautious investors tend to keep 15-25% of their portfolio in gold, but this will depend on the individual investor’s allocation strategy.
Although gold is a powerful tool to protect against inflation and other adverse economic circumstances, investing 100% of your capital in any asset is a very risky move, and that includes gold, stocks, bonds, real estate, etc.
So the key word to always remember is “diversification.”
Investing in gold is profitable, but diversifying is profitable and also safe.
Ready for the next step?
How to invest in gold?
Usually, many people think that they need to buy bullion or any other form of physical format to invest in gold, but in reality, you can invest in gold without physically having it.
Naturally, each option has its advantages and disadvantages, so it’s important to understand how each one works and the benefits they bring.
1.- Gold bars
This is usually the most common option and the most recommended when buying physical gold. You simply buy the bars to store and sell them at the right time.
The main problem with this form of investment in gold is storage, since the pieces usually weigh around 400 oz – although there are also lighter ones – something that can be impractical after a certain number of bars.
However, there are also online companies and platforms like our Top 3 Recommended Gold Services that allow you to buy – even through 401(k) and IRA accounts – and store gold bars just like a savings account, that is, you own your gold bars, but you don’t store them in your home.
2.- Gold coins
This option gives a double benefit, since the metal the coin is made with gains more value, but its numismatic value is also taken into account. Each coin has its own value and price based on the percentage of gold it has and its appreciation in the collectors’ market.
This is a fairly similar alternative to gold coins, but it has the drawback that the value of the jewels is not always directly proportional to the value of the gold used to make them. Other factors that influence the final value is the proportion of gold included in the jewelry and its quality, since 24-karat gold is not the same as 18-karat gold.
1.- Gold ETFs
ETFs are an alternative to physical gold for those who want to focus on short-term investments. These investment funds try to replicate the behavior of gold in the commodity market, and it’s a reliable way to invest in gold without buying the metal.
2.- Gold mutual funds
They are funds that invest in gold and everything related to it. Basically, the fund manager buys mining stocks and other gold related businesses – including ETFs and other derivatives – and although it’ll have some relationship to the price of gold, it won’t replicate it directly. However, unlike physical gold, these investment funds are not typically used as a safe-haven asset.
The bottom line
Buying gold is a diversification strategy that often pays off, especially under uncertain economic circumstances.
Many cautious investors often look to hold stakes in a variety of different assets to hedge against downturns in other economic sectors, so they will include stocks, bonds, real estate and gold in their portfolio.
Having a diversified portfolio that includes a physical asset like gold is a strategy that often outperforms stocks or bonds during economic uncertainty and can help offset losses in other assets when markets or stock and bond prices drop.
As always, do your research diligently and never invest the money you need to live.
Luis Manzanilla is a Computer Systems Analyst living in Venezuela. After working for some time for a FinTech company, he decided to follow his passion and started working as a freelancer.
Since 2015, Luis has been creating content for online businesses to help grow brand awareness, educate readers and gain new customers, focusing mainly on the following topics: personal finance, online business, digital marketing, and technology.