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Investing in gold can be a way to diversify your portfolio, according to Kevin DeMeritt, founder and chairman of Los Angeles-based Lear Capital.
“Gold has an inverse relationship to other types of assets,” DeMeritt says. “Gold and silver have historically performed very well in times of inflation. In times of war or terrorism, usually you're going to find the markets become extremely volatile; gold is typically going to give you more stability.”
Gold can be incorporated into a portfolio in a few different ways. If you’re not sure which type of gold-related investment would be the best option for you, the information below may offer some insight.
What Are Gold ETFs?
Exchange-traded funds are a type of investment in which investors hold shares of an investment pool — often a mix of items such as stocks and bonds, which can be traded on a national stock exchange at varied market prices throughout the day, depending on the related demand.
Some ETFs are passively managed — essentially focused on achieving a predetermined return that is equivalent to a certain market index — or actively managed, where investments are bought or sold to support a certain objective.
The Securities and Exchange Commission advises looking at both an ETF’s summary and full prospectus before investing in it to ensure you understand the overall goal, approach, costs, and other elements.
Why Do People Invest in ETFs?
Like physical gold assets, ETFs can potentially serve as a hedge against more volatile items in a portfolio. Because the funds typically involve multiple assets, if gold prices decline, the impact may be less significant than with a single gold-related stock.
ETFs may offer less liquidity than physical gold assets such as gold coins or bars, though.
With a gold ETF, you’re investing some portion of your money in derivative contracts that are backed by a precious metal. As a result, you will receive money for the current value of the investment at the specific point when you choose to redeem the ETF.
You can’t opt to receive actual gold when you close out your investment, like you can when you decide to begin taking distributions from a gold-backed self-directed individual retirement account. (For more information about what that type of account entails, view the IRA FAQ on Lear Capital’s website.)
Physical ownership of gold, according to Kevin DeMeritt, can offer you control of the investment. You decide when to buy and sell precious metal assets and what allocation of your portfolio they’ll comprise.
An investment in gold stocks or ETFs can be subject to numerous external factors. Mining company operational challenges, for example, can impact a stock’s value.
“Things can affect that stock that have nothing to do with the price of gold,” Kevin DeMeritt says. “[A company] could bribe some government official [for example], because it’s pretty hard to dig a hole in the ground for gold without tons of rules and regulations, and then [the truth] comes out — and the stock potentially crashes.”
Other business aspects can also impact share values.
“You have what we call third-party risks that you don’t have with physical gold,” Kevin DeMeritt says. “You’ve got the risk of the CEO hedging gold one way and it goes the other way, and appreciation you thought you were going to get was right, but went the wrong way. The company could take on a little bit too much debt, interest rates go up, their earnings crash because they have to pay all this interest — and now I’m paying for it because I own the gold stock, as opposed to the actual gold.”
Similarly, with the metal involved in ETFs sometimes held in a different country, issues could possibly arise, Kevin DeMeritt says.
“If something goes wrong with [the] bank, you have a problem,” he says. “How do I get the gold back over here? In most of [the] documents for exchange-traded funds, it says, ‘If there is an issue, we can give you a like-kind asset.’ I don't know anything that’s like gold, so I don’t know what other asset you’re going to give to me. Some people [say], ‘They’re just going to give you another stock — maybe another exchange-traded fund.’ It isn’t really the metals they're talking about; it’s just another piece of paper.”
Tangible Appeal of Precious Metals
Physical gold has been a valued resource for centuries. Its use in jewelry and decorative objects dates back to 4000 B.C., and according to the National Mining Association, it has been utilized as a currency since roughly 1500 B.C., when the 11.3-gram gold shekel coin became a unit of measure in the Middle East.
Starting the 1970s, gold prices began to escalate significantly, moving from $97.39 in 1973 to more than three times that amount by the end of the decade. In 2010, gold topped the $1,000 mark — with the average annual price for 1 troy ounce reaching $1,224.53 that year.
With some fluctuations, gold’s price has generally continued to climb. Last year, in particular, was a strong period for the precious metal.
As Lear Capital’s pricing records show, gold prices began 2023 at less than $1,850 an ounce; after spot gold prices hit a record level of more than $2,100 an ounce in December, by the close of 2023 gold was above $2,050. In 2023, the average price for 1 troy ounce of gold was $1,943.08, according to NMA data.
Gold’s historical price activity, coupled with its status as a limited resource, have helped drive interest in the asset over the years — in physical and other formats — which Kevin DeMeritt expects to continue.
“Gold is used to diversify during recessions, market volatility, war,” the Lear Capital founder says. “When investors are worried about the economy, usually you get more people turning to gold. It [can be] a great time to add at least some portion of their portfolio into that asset category.”
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