If you’re wondering whether investing in gold pays off, you’re not alone. The question has been a central economic one for centuries, and that was before dodgy sales pitches selling various gold-linked investments on cable, online, and talk radio became ubiquitous in recent years.
These advertisements could make one think gold investing is as sketchy as the medical supplements whose promos they follow. The Commodities Futures Trading Commission’s (CFTC) article on these seemingly omnipresent sales pitches doesn’t go subtle with its title: “Gold Is No Safe Investment.” Like the Federal Trade Commission and other regulators, the CFTC has seen a significant rise in gold-related frauds and cons, often led by dubious claims about gold always being a risk-free store of value.
However, experienced investors know gold to be a prudent way to diversify their portfolios. They have also wondered whether it pays to invest more in gold now, given the significant rise in prices in recent years. The record for gold prices was set in 2024—nominally at least since the inflation-adjusted record value was in 1980 (about $3,200 in 2024 dollars)—and today, investors often have as many reasons to buy assets in the precious metal as the methods to do so.
Key Takeaways
- Goldbugs have often encouraged investors to own the precious metal as part of a diversified long-term investment portfolio.
- Gold is seen as a hedge against inflation and a store of value through market ups and downs.
- Investors can hold physical gold directly as coins, bullion, or jewelry; or indirectly via mutual funds, exchange-traded funds (ETFs), gold derivatives, or gold-mining stocks.
- However, holding gold comes with distinct costs and risks, and the data shows that gold has disappointed investors in different historical periods.
Market professionals generally view gold as a way to diversify a portfolio and hedge against inflation. Gold can also be a safe-haven asset when the economy turns sour, and the prices of stocks and bonds decline. However, it’s essential to approach gold investments cautiously and thoroughly research any claims made by those promoting them. Investors should be wary of high-pressure sales tactics and promises of guaranteed returns, as these are red flags for questionable investment schemes.
You can more safely invest in gold through exchange-traded funds (ETFs), stocks in gold mining firms and associated companies, and physical coins or bullion. Ultimately, investing in gold depends on your circumstances and market outlook. It’s essential to consider your financial goals, risk tolerance, and overall strategy before making any decisions. Consulting with a qualified financial advisor is always an appropriate course of action.
Is It Time To Invest in Gold?
Over the decade from June 1, 2014, to May 31, 2024, gold appreciated by about 84% (see the chart below). This increase, however, was not linear, as demonstrated by an annualized monthly standard deviation of 14.06%. It had an annualized compound annual growth rate (CAGR) of 5.66%, and the CAGR since the U.S. went off the gold standard in 1971 is 7.81%. These figures suggest that gold has significant volatility alongside competitive returns, making it a potentially attractive option for both traders and investors.
The decision to invest in gold and the timing of such investments should be based on a combination of macroeconomic indicators, market trends, and your trading goals. Investing in gold comes with risks and costs that should be weighed carefully. Below is a chart of the year-to-year percentage change in the price of gold juxtaposed with the returns of the S&P 500 index, an often-used benchmark of the 500 largest companies in the U.S.
A Brief History of Gold
Gold’s history began well before the ancient Egyptians, who started making jewelry and religious artifacts. Yet it wasn’t until around 560 B.C.E. that gold started to be used as a currency.
At that time, merchants wanted to create a standardized and easily transferable form of money to simplify trade. Creating a gold coin stamped with a seal seemed the answer, as gold jewelry was already widely accepted and recognized worldwide.
Following the advent of gold as a medium of exchange, its importance expanded, with relics of the metal from the Greek and Roman empires prominently displayed in museums worldwide. Later, Great Britain developed its gold-based currency in 775 A.D., and the British pound (symbolizing a pound of sterling silver), shillings, and pence were all based on the amount of gold or silver represented. Eventually, gold symbolized wealth throughout Europe, Asia, Africa, and the Americas.
The U.S. Bimetallic Standard
The U.S. established a bimetallic standard in 1792, shortly after its founding. The bimetallic standard simply stated that every monetary unit in the U.S. had to be backed by either gold or silver. For example, one U.S. dollar was the equivalent of 24.75 grains of gold, and the coins represented the gold or silver on deposit in the U.S. Treasury.
The era of the gold standard emerged in the 19th century, with the U.K. being the first country to adopt it in 1821. The gold standard gained broader acceptance in the late 1800s, with many countries, including the U.S., Australia, Canada, and Germany, adopting the system (silver is still used in parts of Asia, the Middle East, and Latin America). This ended at the outbreak of World War I in 1914 when many countries suspended the convertibility of their currencies into gold to finance the war effort. After the war, attempts were made to resurrect the gold standard, with the U.K. returning to it in 1925 and others following suit.
The Great Depression put significant pressure on its use as countries facing destitute populations looked to stimulate their economies through monetary expansion. The U.S., under President Franklin D. Roosevelt, officially abandoned the standard in 1933. A year later, the Gold Reserve Act of 1934 gave the U.S. government title to all the gold coins in circulation and ended the minting of any new gold coins.
In 1944, the Bretton Woods Agreement established a new international monetary system, with the U.S. dollar becoming the world’s reserve currency, that is, other currencies pegged their value to the U.S. dollar, which was backed by gold. This part of Bretton Woods lasted until 1971, when U.S. President Richard Nixon ended the direct convertibility of the U.S. dollar to gold, effectively ending the gold standard era.
Today, no country adheres to it. Instead, most nations have a fiat currency system, where the currency’s value is not tied to any physical commodity but is determined by supply and demand in the foreign exchange market or being pegged to the value of another currency like the U.S. dollar.
Gold in the Modern Economy
Even though gold no longer backs the U.S. dollar (or other worldwide currencies, for that matter), it still carries importance in today’s society. One needs to look no further than the balance sheets of central banks and other financial organizations like the International Monetary Fund.
Central banks and multilateral financial institutions hold almost one-fifth of the world’s supply of above-ground gold. In addition, several central banks have added to their gold reserves lately, reflecting concerns about the long-term global economy.
Gold as a Store of Value
The reasons for gold’s importance in the modern economy center on the fact that it has successfully preserved wealth throughout thousands of generations. The same, however, can’t be said about paper-denominated currencies.
To put things into perspective, consider the following example: In the early 1970s, one ounce of gold equaled $35. Let’s say that at that time, you had a choice of either holding an ounce of gold or simply keeping the $35. They would both buy you the same things, like a new business suit or a fancy bicycle. However, if you had an ounce of gold today and converted it for today’s prices, it would still be enough to buy a new suit, but the same can’t be said for the $35. In short, you would have lost a substantial amount of your wealth if you held the $35 instead of the ounce of gold because the value of gold has increased, while the value of a dollar has been eroded by inflation.
However, gold is not the only store of value. Below are the results if you had invested $100 in gold and the S&P 500 in 1971, the year the U.S. went off the gold standard.
Gold as a Hedge Against the Dollar
The idea that gold preserves wealth is even more important in an economy where investors face a declining U.S. dollar and rising inflation. Historically, gold has served as a hedge against both of these scenarios. With rising inflation, gold typically appreciates in value. When investors realize their money is losing value, they will start positioning their investments in a hard asset that has traditionally maintained its value. The 1970s present a prime example of rising gold prices amid rising inflation, as seen in the chart above.
Gold benefits from a declining U.S. dollar because it’s priced in U.S. dollars globally. There are two reasons for this relationship:
- Those buying gold (i.e., central banks) must sell their U.S. dollars to make this transaction. This ultimately drives the U.S. dollar lower as global investors seek to diversify out of the dollar.
- A weakening dollar makes gold cheaper for investors who hold other currencies. This results in greater demand from investors holding currencies that have appreciated relative to the U.S. dollar.
Gold as a Safe Haven
Whether it is the tensions in Ukraine, Eastern Europe, the Middle East, Africa, or elsewhere, political and economic uncertainty is part of our shared reality in the mid-2020s. For this reason, investors have been looking to gold as a safe haven, driving its price up in recent years.
History is full of collapsing empires, political coups, and failed currencies. During such times, investors holding gold could successfully protect their wealth and, in some cases, even use the commodity to escape the turmoil. Thus, investors often buy gold as a safe haven whenever news events hint at global economic uncertainty.
Given the events ranging from Sept. 11, the 2004 Iraq invasion, the 2007-to-2008 financial crisis, and on and on, up to the pandemic and the war in Ukraine in the 2020s, the last quarter century has been one where many have sought financial safety. Below, you can see the difference between investing $100 in gold vs. the S&P 500 index in 2000.
Gold as a Diversifying Investment
In general, investing in gold is seen as a way to diversify your portfolio, whether you are worried about inflation, a declining U.S. dollar, or protecting your wealth over the long term.
If your focus is simply diversification, gold isn’t correlated to stocks, bonds, or real estate, meaning even if all else is declining, gold can often be a place of relative safety.
Investing in Gold Companies as a Dividend-Paying Asset
Gold stocks are typically more appealing to growth investors than to income investors. Gold stocks generally rise and fall with the price of gold. Nevertheless, well-managed mining companies are profitable even when gold prices are down. Gold stock prices often magnify increases in the price of gold. A relatively small increase in the price of gold can lead to significant gains in the best gold stocks, and owners of gold stocks typically obtain a much higher return on investment than owners of physical gold.
Even investors focused on growth rather than steady income can benefit from choosing gold stocks with historically substantial dividends.
The Gold Mining Sector
The mining sector, which includes companies that extract gold, can experience high volatility. When evaluating the dividend performance of gold stocks, consider the company’s performance over time regarding dividends. The company’s history of paying dividends and the sustainability of its dividend payout ratio are two key elements to examine in the company’s balance sheet and other financial statements.
A company’s ability to sustain healthy dividend payouts is greatly enhanced if it has consistently low debt levels and strong cash flows, and the historical trend of the company’s performance shows steadily improving debt and cash-flow figures. Because any company goes through growth and expansion cycles when it takes on more debt and has a lower cash-on-hand balance, it’s imperative to analyze the performance over the long term.
Different Ways To Invest in Gold
One of the main differences between investing in gold several hundred years ago and today is that there are many more investment options:
| Gold-Related Investment | Description | Advantages | Disadvantages |
|---|---|---|---|
| Physical Gold | Gold bars or coins. | Tangible asset; potential hedge against inflation. | Requires secure storage. |
| Gold Funds (ETFs/Mutual Funds) | Funds that track the price of gold or invest in gold mining companies. | Liquidity (easy to buy and sell); diversified exposure to gold; professional management (for mutual funds). | Not a direct investment in physical gold; may have higher management fees. |
| Gold Mining Stocks | Stocks of companies that mine gold. | Potential for solid returns if gold prices rise. | High risk because of volatility in gold prices and mining industry risks. |
| Gold Futures and Options | Contracts to buy or sell gold at a future date. | Potential for high returns; hedging against price fluctuations. | High risk and complexity; requires an understanding of derivatives markets. |
| Gold Jewelry | Gold necklaces, bracelets, rings, etc. | Tangible asset, potential hedge against inflation; aesthetic value. | Requires secure storage; high markups and low resale value; craftsmanship and design affect value. |
What Are the Risks of Investing in Gold?
There are several risks to investing in gold, including as follows:
- Price volatility: The price of gold can be volatile, and it may fluctuate significantly over short periods. This can make it difficult to predict its value and can make it a risky investment.
- Inflation: Some investors buy gold as a hedge against inflation, but there is no guarantee that the price of gold will increase along with inflation.
- Political upheaval: Gold prices can be affected by political events, such as wars, national elections, and changes in government policies.
- Storage and insurance costs: If you physically own gold, you need to store it safely and insure it against loss or damage. These costs can add up quickly.
What Are Gold-Based Savings Plans?
Gold-based savings plans are investment programs typically offered by banks and financial institutions where investors can accumulate gold in small quantities over time. These plans often allow for regular contributions, and the accumulated gold is stored securely by the institution, reducing the risk and hassle associated with physical ownership. At maturity or by request, you can redeem your holdings in physical gold or cash.
What Is the Difference Between Silver and Gold as an Investment?
Gold and silver are both metals that attract traders and investors, particularly during times of economic uncertainty. However, gold has a much larger market value than silver, gold has less industrial use than silver and tends to be less volatile than silver. Nonetheless, diversifying between the two can provide a balanced approach to precious metal investing.
What Is the Difference Between Investing in Gold and Bitcoin?
Investing in gold versus bitcoin comes down to your risk tolerance, goals, and preferences about asset tangibility and stability. Gold is suited for those seeking a relatively stable investment to preserve wealth and hedge against economic instability. Bitcoin appeals to those willing to accept higher risks for the potential of high returns and those who believe in the future of cryptocurrencies as part of the digital revolution in financial systems. Diversification across both could mitigate risks while capitalizing on potential gains from both.
What Are Gold Certificates?
Gold certificates represent ownership of a specific amount of gold stored by the issuer, usually a bank. They are essentially paper documents that certify the holder’s claim to a certain quantity of gold. This allows you to benefit from gold’s price moves without the need to manage the physical asset.
The Bottom Line
Investing in gold can often be a prudent choice for those seeking to diversify their portfolios, hedge against inflation, and protect their assets during economic uncertainty. Gold’s enduring value and its role as a safe haven asset make it a compelling investment, particularly in volatile or unpredictable markets.
While it may not offer the high returns of more volatile assets, gold provides balance to a portfolio that can reduce risk and preserve capital over time. However, there are better and worse times to invest in gold, and your decision should also be based on your risk tolerance and financial goals.
