Investing in Gold: the Pros, the Cons and Whether to Even Invest at All

A business man sits on a stack of gold bars.
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Human beings have been hoarding gold since biblical times, and that’s never changed. In fact, gold is having kind of a moment right now.

The price of gold is up. More people are investing in gold because they’re afraid of stock market fluctuations and the possibility of a recession. And for the first time in a decade, more Americans think gold is a better long-term investment than stocks, according to a recent Gallup Poll.

The problem is, investing in gold can be a real challenge for beginners. The sheer number of investing options available to you can be overwhelming and confusing.

Seriously, you can invest in gold bars, gold coins, gold jewelry, gold ETFs, gold IRAs, gold mutual funds, gold futures or gold mining companies. It’s a lot. It’s way too much, really.

We’re here to demystify those choices. How can you as a beginner invest in gold? Also, should you invest in gold? We spoke to some financial advisers, and there’s not necessarily a simple answer to that question.

We’re going to look at the main ways of investing in gold, as well as the pros and cons of investing in gold.

6 Ways to Invest in Gold

From IRAs to ETFs, there are several ways to invest in gold. Some of these come with extra costs and challenges, so you’ll want to do your homework to find out which method is best for you.

Physical Gold

This is what most people think of when they hear the phrase “investing in gold.” You could collect your own little dragon’s hoard of the shiny stuff itself.

Physical gold, also known as gold bullion, tends to come in two forms: gold bars and gold coins.

Gold bars are larger, more expensive and harder to sell. They’re typically sold in 1- or 10-ounce bars, and an ounce of gold costs nearly $2,000 as of this writing. So you’d be looking at spending $2,000 to $20,000 on a single bar of gold.

(You can find current gold prices online. Just know that you’re probably going to pay a little extra to cover the seller’s overhead.)

Gold coins are a more realistic buy for most small investors. Gold coins are smaller, less expensive and easier to sell, so they’re a more liquid investment than gold bars.

Some common gold coins are the South African Krugerrand and the American Gold Eagle, which are produced by the U.S. Mint. They can be purchased from a reputable dealer in any decent-sized city or online. You can look up gold dealers on Trustpilot to see how their customers are scoring them.

(Beware of any dealer who promises spectacular returns on your investment or who pressures you to act right away.)

There are also rare gold collectors’ coins, but we recommend that beginners skip those because it’s hard to get an accurate value for them, and they’re often sold at a significant markup. It can be hard to make your money back if you decide to sell them later.

The biggest problem with physical gold is that it has to be stored in a safe place, like a safe or a bank deposit box. It should also be insured.

“Safely storing gold can require purchasing a safe or utilizing a secure storage facility, which adds expenses to the investment,” said Ally Mataj, co-founder of the jewelry company Bonheur Jewelry.

You might strike it rich if you vacation at one of these seven places in America that let you pan for gold and more.

Gold Funds

“I think the biggest misconception is that people think they need to buy physical gold and take delivery,” said Simon Popple, managing director of the commodities investment firm Brookville Capital. “They think they’re going to have gold bars lying around the house.”

You don’t have to go that route. For beginners who want to invest in gold, a popular way to do it is to buy gold-oriented exchange-traded funds, or ETFs, and mutual funds. OK, so that’s less fun than holding a gleaming gold bar in your hand. But it’s a lot easier.

A gold ETF or mutual fund invests in a bunch of different gold-related assets, like lots of different companies in the gold industry — companies that mine and process gold. The fund might also invest in gold bullion.

Mutual funds are actively managed by humans, while most ETFs are passively managed, which means they attempt to mirror the makeup of a market index.

ETFs are probably a better choice for most beginners because mutual funds often require an upfront investment of anywhere from $1,000 to $2,500. You can spend less and buy a single share of an ETF, or even a fraction of a share.

It’s easy to purchase a gold ETF through an online brokerage account. You can open an online brokerage account with a company like Vanguard, Fidelity or Schwab, or with a robo-adviser like Robinhood, Betterment or Wealthfront.

However, you should know that investing in gold doesn’t have a history of outperforming the stock market.

“Historically, gold underperforms stock funds,” said Demetri Kolokouris, co-owner of the online gold exchange Express Gold Cash. “For older people closer to retirement, this may be part of a useful strategy, but for young people with a long investment horizon, it’s generally viewed as a poor decision.”

But trying to outperform the stock market isn’t why most people invest in gold. Typically, they invest in gold as a way of diversifying their investments, so they’re not putting all their eggs in one basket. The price of gold is independent of what the stock market happens to be doing at any given time.

In fact, “gold and stocks have a bit of a ‘love-hate relationship.’ They frequently move in opposite directions, making gold a superpower against losses when the stock market decides to tumble,” said Leo Smigel, personal finance expert and founder of the investment advice website Analyzing Alpha.

Gold IRAs

If you want to diversify your retirement portfolio, you could invest in a gold IRA. Like an exchange-traded fund or mutual fund, a gold IRA invests in a number of different gold-related assets.

You can invest in a gold IRA through an online retirement account with a brokerage like Vanguard, Fidelity or Schwab.

Gold Jewelry

Gold jewelry is certainly nice to own, but it’s not really the best investment. You’re paying a significant markup if you buy it retail, and you probably won’t be able to sell it back for the same price.

We’re going to quote from The Penny Hoarder’s article on how to sell your gold jewelry.

If you bought gold jewelry before the pandemic, this could be a good time to sell if you’re looking for some extra cash. Gold was already on an upward trajectory in 2019, but from 2020 onward, it’s comparatively skyrocketed.

Like we mentioned before, you’ll find current gold prices online, but only institutional sellers get the “spot price.” Why? Companies that buy your bullion or jewelry pay for advertising, overhead, melting jewelry, etc. — and they have to make a profit — so they buy below spot.

Aim to get 90% to 95% of the spot price when selling gold bars or coins, and 70% to 80% of melt value for jewelry and other items.

Looking to sell some gold jewelry or a coin collection? We offer tips and tricks to maximize your return, including how to get an appraisal and where to sell your gold.

Gold Mining Companies

You could invest in the individual stocks of gold mining companies. But frankly, one big advantage of ETFs and mutual funds is that they’re less risky than individual stocks.

Gold Futures

For beginning investors, we recommend skipping gold futures entirely. By entering into a gold futures contract, you’d be agreeing to buy or sell a certain amount of gold at a later date.

Basically, it’s really complicated and you could lose a lot of money. Just skip this one for now.

The Benefits of Investing in Gold

It’s time to look at the pros and cons of investing in gold. Let’s look at the benefits first.

It Holds Its Value in Difficult Times

“Gold is the ultimate safe haven. In times of extreme political uncertainty and international conflict, gold can protect against a wide range of rare and severe risks,” said Asher Rogovy, chief investment officer of the investment firm Magnifina. “Its value is not tied to any one country’s currency or economic performance. Gold’s history in this role speaks for itself.”

It Diversifies Your Portfolio

When it comes to investing, you should never put all your eggs in one basket. Spread the risk around.

“Gold can provide diversification benefits to your investment portfolio,” said financial coach Michael Ryan. “It tends to have a low correlation with traditional stocks and bonds, meaning it can help reduce the overall risk of your portfolio and potentially improve its stability.”

It Is a Highly Liquid Asset

If you need money, you can always sell your gold.

“Gold is a highly liquid asset, meaning it can be easily bought or sold in the market,” said Jon Morgan, CEO of the consulting firm Venture Smarter. “There is a well-established global market for gold, and it is traded 24 hours a day.”

The Drawbacks of Investing in Gold

Now let’s take a look at the cons.

It Has to be Stored

If you buy physical gold, you have to store it somewhere.

Serious investors frequently rely on precious metals depositories, such as the International Depository Services Group, which has secure storage vaults in Texas, Delaware and Canada, said Terry Hanlon, president of the precious metals trading company Dillon Gage.

Other Investments Make More Money

Experts say that, over time, stocks are a better investment than gold.

“If you’re trying to grow a nest egg for retirement, investing heavily in gold will leave you missing out on major potential profits elsewhere,” said Anthony Martin, founder of the insurance company Choice Mutual.

From 1971 to 2022, he said, gold gained only an average of 7.78% compared with 10.21% for U.S. stocks. “Assuming the same average, if you let $10,000 grow for 40 years in gold investments, you would have $62,309 rather than the $107,619 you’d earn from the stock market.”

The Bottom Line

Should you invest in gold? Maybe, but not too much. It should be a relatively small percentage of your overall investment portfolio.

Liam Hunt, finance writer for the website Sophisticated Investor, points to well-known billionaire investors like Ray Dalio who allocate 5% to 10% of their wealth to precious metals as a means of diversifying their investments.

Also, even though it’s less fun, we recommend investing in gold ETFs (not mutual funds) instead of gold bullion.

“If you invest in physical gold, you will likely pay quite a bit in storage or delivery fees, and it can be inconvenient and nerve-wracking to store your gold at your home,” said Dr. Enoch Omololu, founder of the personal finance website Savvy New Canadians.

“Purchasing gold ETFs through a discount brokerage is the easiest and most affordable way to invest in gold,” he said. “If you choose a precious metal mutual fund that holds gold, most charge hefty management fees, which cuts into your overall returns over time.”

Mike Brassfield ([email protected]) is a senior writer at The Penny Hoarder.