Is Gold a Good Investment?

Gold is a popular alternative investment, especially during periods of high inflation. People view it as a store of value. But is gold a good investment? 

The popularity of gold is global and historical. In ancient times gold was used for jewelry and eventually employed as a currency. Countries used the gold standard from the late-1800s until 1933, and nations kept gold reserves. Variations of this system lasted until 1973, when the U.S. dollar started to float freely and became a fiat currency.

But despite its historical role, is gold a good investment? 

Reasons Why Gold Is a Good Investment

Consumers and institutions think gold is a good investment for several reasons. 

Store of Value

First, gold has been a universal store of value for thousands of years. During periods of inflation, deflation, recessions, and geopolitical uncertainty, governments and their people have used gold to trade and make exchanges. Gold’s attributes have allowed it to remain a store of value. The metal is financially liquid, portable, and accepted globally. Moreover, gold does not degrade, has beauty, and is scarce, creating a perception of value.

Hedge Against Inflation

Investors typically believe that during inflationary periods, the price of gold goes up as the cost of living rises. On the other hand, fiat currencies lose their purchasing power because of inflation. Many examples exist of inflation causing currencies to devalue, like the Argentinian peso, the Turkish lira, or the Venezuelan Bolivar.

As a result, rather than holding dollars or other currencies, investors often buy gold driving its price higher. Along these lines, investors tend to buy more gold when the U.S. dollar weakens against other currencies. But the inverse is also true—a strong dollar results in lower gold prices.

The data supports this viewpoint. In 1970, the price of gold was $35 per ounce. The spot price is now $2,000+ per ounce. Over the same period, according to the CPI inflation calculator, $100 in 1970 became $798.51 at the end of March 2023. In another example, the year 2022 was one of high inflation, but gold demand increased. Similarly, research shows in the eight years between 1974 and 2008, when inflation exceeded 5%, gold prices rose 14.9%, outperforming other asset classes.

Despite the above data, gold is sometimes an ineffective inflation hedge, like from about 1980 to 2000.

Protect Against Deflation

Gold also protects against deflation when prices drop, like during the Great Depression. People tend to hoard gold to guard against deflation since gold holds its value. For example, between 1929 and 1933, prices fell by 31%, but gold’s purchasing power increased.

In addition, gold is often bought during times of economic and geopolitical uncertainty, like recessions or wars. For example, gold’s price rose initially post 9/11, during the subprime mortgage crisis, and the COVID-19 outbreak in 2020.

Higher Future Demand

Demand for gold has grown due to strong cultural reasons in some countries. As citizens of many countries become wealthier, they buy more gold for jewelry and investing, leading to higher prices. In addition, gold is increasingly used in electronics, aerospace, dentistry, and medicine.

Higher demand combined with slow supply growth from mining supports gold prices.

Asset Class Diversification

Gold is often uncorrelated to stocks, bonds, cash, real estate, and cryptocurrencies, allowing investors to diversify their portfolios. As a result, investors can buy physical gold. Alternatively, they are increasingly purchasing gold exchange traded funds (ETFs). The ETFs may own physical gold or gold mining stocks. The ETFs are more straightforward to trade and more liquid than physical gold for retail investors.

The largest gold ETF is SPR Gold Shares (GLD). It provides investors with a way of buying or selling gold without needing to exchange physical gold. The ETF trades like any other on a stock exchange. The ETF currently owns ~29,827,227 Troy ounces of gold. The GLD ETF has a sibling, SPDR Gold MiniShares, with a lower expense ratio, but it is less liquid.

Other relatively large ETFs owning only gold bullion are iShares Gold Trust (IAU), iShares Gold Trust Micro (IAUM), GraniteShares Gold Trust (BAR), abrdn Physical Gold Shares ETF (SGOL). In addition, ETFs like VanEck Gold Miners ETF owns gold mining companies. 

Or an investor can directly own gold mining stocks. Companies like Barrick Gold (GOLD), Newmont (NEM), and Franco-Nevada (FNV) trade on U.S. exchanges.

Reasons Why Gold Is Not a Good Investment

Reasons also exist why there are better investments than gold. 

Does Not Pay Dividends or Interest

Gold does not pay dividends or interest and thus does not provide income to investors. Therefore, a retiree may own gold but not receive a passive income stream, unlike dividend stocks, bonds, Series I Savings Bonds, money market accounts, and savings accounts. For stocks, the total return is approximated by price appreciation or depreciation, dividend yield, and price-to-earnings ratio (P/E ratio) expansion or contraction. On the other hand, the total return for gold is only from price appreciation or depreciation. Hence, the lack of a passive income stream is one reason gold is not a good investment for many retirees.

Storage of Physical Gold is Difficult

Physical gold is difficult to store safely because of its density and bulk. An option is to store it in a safe at home, but this choice is probably the riskiest. Instead, an investor should store it securely, like a safe deposit or a private depository. However, banks do not insure the contents of safe deposit boxes. Private depositories are vault storage maintained by professionals and the gold is possibly insured against loss. However, they have a fee, and returns will be lower.

Liquidity

Cash, stocks, and bonds are more liquid than physical gold. But gold has its own market and spot price. That said, gold bars are more difficult to exchange. Consequently, many investors prefer gold coins because dealers will buy and sell them. Moreover, government-minted coins, like the American Eagle and Canadian Maple Leaf, are legal tender.

In addition, cash is king when paying bills and making purchases. Gold does not serve well for those purposes. During times of economic uncertainty, investors often flock to cash too. Demand for short-term U.S. Treasury bills tends to rise during recessions.

Volatility

Gold has also experienced significant short-term price volatility. For instance, gold was priced at about $1,000 per Troy ounce in March 2008 and plunged to ~$700 per Troy ounce in November 2008. This movement was followed by a steep rise to $1,900 per Troy Ounce by August 2011. Most investors cannot stomach this type of volatility, which is a reason why gold should never be in a significant position in your portfolio.

Underperformance

Gold can underperform stocks for decades. Gold’s use as currency goes back thousands of years as a store of value. But the recent history of gold illustrates greater fluctuations. For example, the price of gold peaked in 1980 and did not reach that price again until 2000. Moreover, between 1989 and 1999, when global economies and the stock markets were performing well, gold fell by (-27%). The main point is that gold has inconsistent performance.

Higher Capital Gains Tax Rate

Gold is taxed differently than the capital gains rate for equities. In America, it is taxed at the collectibles capital gains rates. If you own and sell the gold in less than one year, the tax rate is your ordinary income tax rate. But if the holding period is greater than one year, the tax rate is the ordinary income tax rate capped at 28%. 

Hence, buying and selling gold may make sense for those in higher income tax brackets. However, this rate is higher than the long-term capital gains tax rates of 0%, 15%, and the maximum of 20%. It is also higher than the dividend tax rates.

Statistics on Gold as an Investment

Gold’s value comes from its difficulty in acquiring it. It is a precious metal. Since antiquity, gold has been used as a currency and a store of value. Today, gold is owned globally. But it is more popular in some countries, driving up demand. Additionally, countries maintain substantial gold reserves.

American Gold Ownership

In the United States, as of 2020, a survey indicated only about 10.8% of people between the ages of 18 and 64 own gold. Most owned 14-carat and 22-carat jewelry. But few people owned gold bars or gold coins. This level of ownership is a meager amount compared to the percentage of adult Americans holding stocks ranging from 52% – 63% in the past 20 years. The value was at 58% in 2022. The percentage goes up drastically for people earning more than $100,000 and those with more education. The main point is Americans only buy a little gold, even though the United States Central Bank has the largest reserves.

Countries with the Largest Demand

The two countries with the greatest gold demand are China and India, based on total volume. China, India, the United States, Germany, and Thailand are the top five countries for gold consumption.

China’s gold purchases are driven by its central bank and consumer demand for jewelry. In addition, China has been buying gold as a hedge against inflation and for trade outside of using the U.S. dollar. In fact, China’s central bank was the No. 2 purchaser of gold at 1,552 tons from 1991 to the end of 2021. Russia is the only country to have surpassed it in the same period.

Although India’s central bank acquires gold, the prime driver is consumers buying jewelry. Some estimates put the Indian people’s gold holdings at more than 850 million ounces or more than $1.7 trillion at the current spot price of $2,013 per Fine Troy Ounce. Moreover, estimates suggest Indians invest about 8% of their annual income in gold because it is highly valued and viewed as a store of wealth.

The top five countries for the largest demand change to Switzerland, Germany, the United States, Saudi Arabia, and Vietnam on a grams per capita basis.

Gold Reserves

The United States central bank has the largest gold reserves of all countries, more than the following two countries combined. At the end of March 2023, the U.S. held 261,143,154 Fine Troy Ounces. This gold is valued at more than $500 billion at the current spot price. But the book value is much lower because, by a 1973 statute, the price is set at $42.222 per Troy ounce. Most of this gold is held at Fort Knox, West Point, Denver, and the New York Fed vaults.

The top five countries’ gold reserves are the United States, Germany, Italy, France, and Russia. In addition, the International Monetary Fund (IMF), European Central Bank (ECB), and the Bank of International Settlements are major owners of gold reserves.

Gold is a Good Investment for Certain People

Gold is not for most investors, but it has a place in some portfolios for diversification. Due to the challenges, most people want to avoid buying and holding gold bars or coins. Other ways to buy gold are ETFs that own gold or gold mining companies. In some portfolios, gold is a good investment for diversification and to protect against inflation or deflation. However, reasons exist not to buy gold, and investors should understand the risks and tax consequences.

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