It’s 2020, and you’ve probably heard a lot of talk about investing in precious metals of late. In fact, it’s a topic that financial advisors are asked about on a regular basis. And it’s a good question—if you’re looking to build the most solid portfolio, should gold be a part of it?
With talk of a recession, the question is even more pertinent, “Is gold a good investment?”
Depending on the advisor, you’re likely to hear a number of answers. But the reality is that only you can decide if it will work for you. The rule of thumb here is—what will bring you the most peace of mind?
Of course, if you still have questions, we’re here to help. Here’s what you need to know to make the best decision for your lifestyle.
The History of Gold
Gold is one of the oldest assets known and utilized by man—in addition to livestock, land, and homes. Even ancient texts and scriptures that date back thousands of years champion the value of gold. Not only has it been traded as money, it has backed currencies across the globe—this is known as the “gold standard.”
And beyond being a currency, it’s a prized commodity—used to make jewelry, watches, and even the circuit boards of mobile phones. Even gold coins that are no longer in circulation are collected for their rarity and their ability to act as an economic “insurance policy” of sorts.
This is because gold is traditionally considered to be a hedge against market instability, or even the devaluation of the US Dollar. What many don’t understand is that gold is far more volatile than the dollar.
While currently valued at more than $1700 an ounce, gold plummeted from around $1900 an ounce to just below $1050 from 2011 to 2015. That drop represented a 45% loss and a six-year low. The chart below covers a span of 10 years, depicting the volatility:
Is Gold a Good Investment in 2020?
Gold is sometimes considered a “crisis commodity,” sold most predictably when the economy seems to be going south, and anxiety is high. When times get tough—as is the case for many right now—gold becomes something of a safe haven.
Yet Warren Buffet has an interesting perspective. He says, “Gold is a way of going long on fear. But you really have to hope people become more afraid in a year or two than they are now. And if they become more afraid, you make money. If they become less afraid, you lose money.”
Those who sell gold will suggest that your best path to survival is to sell everything and turn it into gold or other precious metals. We encourage you to take a moment and consider the longevity of the advice. As one of the founders of the Prosperity Economics Movement, Todd Langford, often says, “When you make a decision out of fear, it is almost always the wrong decision.”
When we’re afraid, we tend to make decisions quickly, without thinking in the long term. And it’s likelier to benefit others more than ourselves, as Warren Buffet suggests. The moral of the story? Don’t let fear dictate whether or not you will buy gold.
Consider What You Want from Gold
For what reason are you looking to buy gold? By Prosperity Economics standards, a purchase of gold is not an “investment.” Despite being a currency, you cannot pay your mortgage with gold. Nor does gold produce cash flow, which is a Principle of the movement.
Gold is not an easy commodity to leverage as collateral, compared to a bank CD or a life insurance policy. And while gold may grow in value over time, what then? The only way it can be utilized is to sell.
So if it’s not really an investment—is it worth having in your portfolio?
Ask Yourself These Questions
Diversification is valuable in any portfolio, yet so many people have stock-heavy portfolios. So a bit of gold is not a bad idea from a diversification standpoint—especially if that gold provides peace of mind. What we do recommend is an exit strategy. Most prospective gold buyers find out the hard way that buying gold is much simpler than selling (unless you’re willing to take a loss).
So before jumping straight to gold, consider you other options. Is the financial security you seek more effectively obtained by:
- Creating a new stream of income? Consider a side-gig, a passive income project, or an investment with cash flow.
- Saving more money in a readily accessible account?
- A garden and a well-stocked pantry?
- A supply of easy-to-barter items?
If there are more effective ways of getting what you want, wouldn’t you utilize them?
The Pros and Cons of Investing in Gold
One of the greatest benefits of gold is its staying power and transferability. In times where people lose their faith in banks and the stock market, gold is at its most appealing.
It is not, however, the only way to diversify. Nor is it the only “safe” investment. Life insurance, immediate annuities, and real estate are also excellent assets. They have a history of appreciation, can be borrowed against, and have tax benefits. Furthermore, they create cash flow.
Ideally, we think that investments should solve a problem. Gold is based in speculation—you’re hoping that the value will rise. In the meantime, you wait.
We encourage you to think about the following, when considering assets for your portfolio:
- Beyond security, does the asset offer certainty?
- Can it create an income stream?
- Is it liquid and available in the event of an emergency or opportunity?
Gold isn’t truly the answer to any of these questions, though we respect that it is one way to diversify. Your personal desires will help dictate the best path.
How to Invest in Gold
There is no question that some people feel more secure knowing there’s some gold in the family safe. If you feel this way—go for it. Our recommendation is to do so in moderation.
Additional considerations include:
- Look to small coins rather than gold bars.
- Stick to gold, as opposed to silver. Central banks buy gold.
- Purchase coins of known weight, as they’re more “tradeable”—American Eagle, Canadian Maple Leaf, and South African Krugerrand, for example.
- Avoid rare collectible coins, as these “works of art” have value beyond the metal, and the process of buying and selling is more complex.
- Beware of Capital Gains, up to 28%. Any gold, collectible or not, is taxed as such—even ETFs that hold gold
And when it comes to storage, do so at home! If gold is your “crisis asset,” do you really want to store it somewhere out of your control? Especially if you have to pay for that storage? Probably not. Make sure it’s accessible, so you can use it when you want.
Gold vs. the Dollar
There is no question that times are challenging. And yet there’s no evidence of massive inflation or a failing dollar. Nor is the US alone in these challenges, as all countries grapple with their economies.
At present, the US dollar remains the world’s primary reserve currency. And the dollar is a reference point for many other global currencies. In terms of price and ease of use, the dollar has actually been more stable than gold. And it is certainly more useable in the present economy—try buying milk or eggs with gold.
So, Is Gold a Good Investment For You?
Only you can decide. With the information presented above, it’s up to you to determine if it will fit into your portfolio. However, our recommendation of a small investment stands—so you can have room for investments that provide positive cash flow and certainty.
Ultimately, financial decisions are emotional decisions. If gold coins give you peace of mind, there’s value to that.
If you’re still looking for answers, or want help creating cash flow, liquidity, and certainty—reach out to a Prosperity Economics Advisor. We have a network across the nation that would be happy to help.