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Inflation has been a persistent thorn in the side of the U.S. economy recently. And, while rate hikes made by the Federal Reserve over the last couple of years have led inflation to drop from its peak of 9.1%, there’s still some work to do. According to the latest inflation report released this week, the inflation rate is climbing again to 3.5% in March — up from 3.2% the month prior.
This ongoing inflationary pressure is causing concerns for many Americans, who see their purchasing power erode and their savings diminish in value. It’s also negatively impacting investors’ portfolios, leading many investors to turn to gold as a potential hedge against inflation.
One major benefit of gold investing is that the precious metal is considered a safe-haven asset that can maintain its value even as paper currencies lose their purchasing power. So, it can make a lot of sense to add gold to your investment mix right now. But there are numerous gold investment options to choose from, so which ones could pay off in today’s inflationary environment?
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6 gold investments that could pay off with inflation rising
If you’re looking to add some gold to your portfolio to combat rising inflation, here are a few gold investment options worth considering.
Physical gold bars and coins
The most straightforward way to invest in gold is to own physical gold bars or coins. Physical gold can be an effective inflation hedge because, unlike paper currency, the intrinsic value of gold is not eroded by inflationary pressures.
When inflation is high, the price of gold tends to rise, helping to preserve the real purchasing power of your assets. Physical gold also provides a tangible store of wealth you can hold in your possession rather than relying on a financial institution.
The main drawbacks are the extra storage and security costs along with the transaction fees involved in buying and selling physical gold. But for investors who want direct exposure to the gold market, physical ownership can be a wise choice in an inflationary environment.
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Gold ETFs and mutual funds
Investing in gold exchange-traded funds (ETFs) or gold mutual funds is a more convenient and liquid way to get exposure to the gold market. These funds hold physical gold or gold futures contracts, allowing you to benefit from rising gold prices without the hassle of securing and storing the metal yourself.
Gold ETFs and gold mutual funds can be a good option for investors who want the inflation-hedging properties of gold but prefer the flexibility and lower costs of a financial product over owning the physical asset. The funds provide instant access to the gold market, with the ability to buy and sell shares on an exchange.
Gold mining stocks
When inflation is high, gold stocks can be an attractive investment. As the price of gold rises, the profitability of gold miners often increases in tandem. This is because the costs of mining operations, such as labor and equipment, tend to be fixed in the short term, allowing miners to capture more of the upside from higher gold prices.
Investing in individual gold mining stocks can provide leveraged exposure to the gold market. And, gold miners’ profits and share prices may rise more sharply than the underlying gold spot price, potentially generating outsized returns for investors. However, gold mining stocks also carry additional risks beyond the gold price, such as operational challenges, management decisions and regulatory factors. So careful stock selection and portfolio diversification are important if you take this route.
Gold futures and options
For more experienced investors, trading gold futures and options can be a way to potentially profit from rising gold prices during inflationary periods. Futures and options provide exposure to gold with higher leverage than buying physical gold or gold funds.
These derivative instruments allow you to speculate on the future price movement of gold without taking physical possession of it. For example, futures contracts let you lock in a gold price for a future date, while options allow you to (but do not obligate you to) buy or sell gold at a predetermined price.
The upside to these gold investing options is the potential ability to magnify gains from gold’s price appreciation. But the downside is that futures and options also carry a greater risk of losses, especially for investors who don’t fully understand the complexities of these financial products. So, proper risk management is crucial.
Gold IRAs
Holding gold as part of your retirement savings in a gold individual retirement account (IRA) can be a prudent inflation-hedging strategy that pays off over time. A gold IRA allows you to own physical gold, gold ETFs or other approved precious metals within a tax-advantaged individual retirement account.
The key benefit of a gold IRA is that it provides tax-deferred or tax-free growth on your gold investments, depending on whether it’s a traditional or Roth IRA. This can maximize the long-term, wealth-preserving power of gold in your retirement portfolio. The tradeoff is the additional setup and maintenance costs associated with a gold IRA. It’s also not prudent to tap into the gold assets held in a gold IRA before retirement.
Collectible gold coins
For those interested in a more specialized gold investment, rare or limited-edition gold coins may be worth considering. The value of these coins comes not just from their gold content but also from their scarcity and condition. And, in an inflationary environment, demand for scarce collectible gold items may increase, potentially driving up the prices.
However, the collectible coin market requires more specialized knowledge to navigate. Investors need to authenticate the coins and buy from reputable dealers to ensure they are getting fair value. Collectible gold coin buyers are limited, so it’s also a less liquid market compared to standard gold bullion or gold funds. In turn, this strategy is best suited for investors willing to take on additional complexity and risk.
The bottom line
Ultimately, the best gold investment strategy for you will depend on your risk tolerance, investment horizon and overall financial goals. But as inflation continues to be a concern, adding some gold exposure to your portfolio could be a smart move to help protect your purchasing power and benefit from the potential inflation-driven price growth of gold.
