The surge in gold’s value is not only buoyed by investor sentiment but a spike in demand from central banks around the world, which bought up gold at record volumes at the start of this year.
As the world’s oldest asset, gold has a lot to offer. Its physical permanence and immutability, combined with its historic role as the ultimate guarantor of the financial system, gives it enduring popularity. It also typically outperforms during times of turmoil, when confidence is low in traditional systems. So is this the time to buy bullion?
This article will look at the bull case for gold in 2023, consider input from financial experts about how much weight the metal should have in your portfolio, and a few ways to gain exposure to this asset.
The Great Stabilizer
Historically, gold has been the resource that underpins most monetary systems. In pre-modern times, it was common for coins to actually contain small traces of gold.
For most of the 20th Century, gold acted as a reserve asset, guaranteeing the value of global currencies. Still, today, when other more liquid mediums of exchange lose their value, gold inevitably rises.
In desperate times, people tend to lean into this so-called “asset of last resort.”
“Gold is like a superhero, saving people from inflation and currency risk for thousands of years. It’s like a shield that protects your portfolio from market volatility and uncertainty,” Jorey Bernstein, Founder and CEO of Bernstein Investment Consultants.
Gold can be bought in various forms, from physical pieces to market-based securities which are tied to gold’s price.
“The kinds of gold assets you should consider depend on your investment goals and risk tolerance,” Bernstein says. “Some options include physical gold (bullion or coins), gold stocks (shares of gold mining companies), and gold exchange-traded funds (ETFs). It’s like choosing between a classic car, a race car, or a car that can transform into a robot.”
“In my opinion, it’s perfectly acceptable to have savings in physical gold, so long as you have a secure place to store it,” says Christine Luken, Financial Dignity Coach.
“My husband and I prefer gold coins to gold securities. However, I consider gold to be another form of currency for our savings and not necessarily an investment that’s going to get me a huge return.”
The same unique properties that make gold valuable also limit it as an asset.
It is ideal as a store of value because it is non-perishable. It is not used up when consumed, unlike crude oil or wheat, and because it can be constantly melted into new forms, gold never really disappears. Thus, regardless of demand, as long as it is continued to be mined, the supply of gold continues to increase over time, which can weigh down on its value.
While it is certainly stable, it is not a growth asset, for it does not actively generate a profit like a productive business or innovative technology. Hence, unlike stocks or even real estate investment trusts, gold itself does not pay dividends. For this reason, some caution against buying gold, even when it appears in vogue to do so.
“I would advise my clients not to buy gold – not now, not ever,” says David A. Fowler, founder of High Mountain Financial Coaching. “Over the long run, gold as an investment only has bond level rates of return but stock market levels of risk. A more risk-averse investor is better served buying bonds; likewise, an investor willing to take on more risk should consider equities over gold.”
Shiny, but Useful?
Some advisors suggest looking beyond gold to consider other metals that are not just used mainly in jewelry but serve other functions in the economy.
“Silver and other precious metals can also be an investment option,” says Bernstein. “Platinum and palladium are like sidekicks that have their own unique superpowers. Platinum is used in automobile catalytic converters, while palladium is used in electronics manufacturing.”
The decision to buy gold must be weighed up and will depend on the preferences and goals of each individual investor.
For risk-averse investors, it may make a lot of sense to hold a portion of your net worth in gold, especially for those who are skeptical of the staying power of the US dollar as the world’s reserve currency.
It is important investors consider the drawbacks, as well as merits of investing in gold and, when needed, consult a financial advisor on how to design the best allocation for their portfolio.