The gold spot price reached a new high on October 30, 2024, marking a year since Costco began selling gold bars on its website. Both events sparked media attention and increased interest in gold as an investment.
Gold can be useful for investors, whether they're beginners or experienced, but it behaves differently from cash, stocks, or bonds, so understanding how to use it effectively is essential. Here’s a guide to investing in gold in four steps.
Step 1: Define Your Goal
Gold is valued for its ability to maintain its worth or even appreciate when other assets are declining. Investors use gold as a stabilizer to limit losses in equities or protect against inflation that erodes cash value. It's also seen as a store of value, potentially acting as a medium of exchange if the dollar were to collapse. As Scott Travers, author of *The Coin Collector's Survival Manual*, puts it, "gold is an insurance policy" against economic instability.
Step 2: Determine Your Allocation
Your portfolio allocation refers to how your assets are divided among categories like stocks, bonds, and gold. Setting a specific allocation helps manage risk over time. As asset values fluctuate, rebalancing ensures that no one category becomes too dominant.
Travers suggests keeping 5% to 15% of your net worth in gold, while others recommend up to 20% for those with higher risk tolerance. Assessing gold's past performance in relation to your risk appetite will guide you in setting the right allocation.
Step 3: Choose a Form of Gold
Once you've decided on your allocation, you need to choose how to invest in gold. The three primary options are physical gold, gold mining stocks, and gold ETFs.
Physical Gold:
This includes jewelry, coins, and bars. The benefits of holding physical gold are peace of mind, as it can serve as currency in an emergency, and no added volatility or fees—unlike mining stocks, which can fluctuate due to company factors, or gold ETFs, which have management fees.
Step 4: Assess Your Investment Horizon
Consider how long you plan to hold your gold investment. Gold can be volatile and has experienced long periods of decline. If your timeline is short, this volatility may be a risk. However, gold can be more suitable for long-term investments, such as hedging against inflation or stock market declines, since these issues will persist over time.
Gold as a Safety Net
A small gold investment can stabilize your portfolio and protect your purchasing power. If stored at home, physical gold can also act as currency during extreme economic crises. However, note that gold has underperformed stocks in the past, so it’s important to balance your allocation wisely.
Paraphrasing text from "Yahoo!Finance" all rights reserved by the original author.