The price of gold fluctuates but historically over the long term, it trends higher. At the time of writing, the 10-year increase is 55.67%.
This means that if you invested $1,000 in gold 10 years ago, it would be worth $1,550 today.
Image courtesy of GoldPrice.org
Additionally, reviewing the pricing trends for 2020, you can see that gold prices spiked during the global pandemic as investors favored commodities over stocks. This is a typical trend during economic downturns and times of uncertainty.
Let's take a closer look at the returns and risks of investing in gold and considerations for including it in your investment portfolio.
Lack of Return
An investment in gold might seem promising until you compare it to the S&P 500. The index which tracks 500 of America’s biggest companies provided a 196.9% return over the last 10 years. That means if you had invested $1,000 in the S&P 500 10 years ago, you’d now have $3,362. That’s substantially more than gold.
However, some investors consider gold to be more of a “safe haven” than the stock market. With no transfer of risk, there is no risk premium with gold, which is expected to retain its real value over time. That comes at a price. Investments considered lower risk like bonds and gold typically return less than riskier securities. It also doesn’t achieve the level of asset diversification you’d get from a robo-advisor.
Risks Due to Volatility
Gold's long-term, intrinsic value makes it a favorite investment vehicle in a fluctuating economy. However, gold prices are volatile and just as risky to pin your faith on as stocks. Investors turn to gold as a place to store value rather than make a profit. That's why gold prices are widely regarded as an indicator of investor confidence.
Gold prices spike in the following circumstances:
- Perceptions of a crisis reduce expected growth in the economy, triggering a desire for stable assets such as gold, cash and government bonds.
- When inflation rises, reducing spending power
When the cost of labor and materials trigger inflation, gold doesn't sharply increase in value. However, during a recession, when the value of currency remains low, people tend to favor gold investments. Eventually, people may lose confidence in U.S. government bonds, pushing gold prices even higher.
The intricate relationship between gold, supply and demand, and inflation tends to have a noisy correlation. It's not easy to pinpoint when to buy gold with cash to hedge your losses.
Gold's Role in Your Investment Portfolio
If your portfolio consists mainly of equities, investing in gold can diversify your investments and stabilize your investment strategy. This is particularly true if you hold high-growth, high-risk stocks or funds that you wish to hedge against losses.
This chart compares equities (S&P 500 in red and the Dow Jones in blue) to gold and silver prices, which outperformed equities greatly in the decade following the 2001 recession. As equities begin to decline, gold in your portfolio will rise in times of a financial crisis.
Image courtesy of LongTermTrends.net
Along with gold, consider other assets to diversify your investment strategy. For example, treasuries and well-rated municipal bonds carry lower yields than equities but higher returns than gold. Many investors include long-term bonds in their portfolios.
Inflation-linked bonds are linked to inflation on a daily basis, using the CPI as an index. During inflationary periods, these bonds can balance out your portfolio. They include industrial metals, energy and similar bond issuers.
Purchasing Through Trading Platforms
Trading platforms offer ETFs that include gold as well as the means to invest in other stocks and index funds like the S&P 500. If you want to start investing it’s wise to do research and uncover the best online trading platforms in Canada or in the United States.
If you decide to include gold or gold-based funds in your portfolio, consider how it plays into your overall investment strategy. Overemphasizing diversified funds can stunt your overall return if you don't balance them with growth assets such as equities.