Investing In Gold For Beginners
Investing In Gold For Beginners
Your complete guide to building wealth and protecting your financial future with precious metals investing
Introduction
Investing in gold is one of the most common and stable ways to safely invest and protect the value of your money over time. Gold investing offers investors a way to build their wealth steadily in the long run by simply allocating it in your portfolio.
Gold may be a solution to help protect your assets from inflation, a phenomenon that the global economy has been experiencing since the COVID-19 pandemic. The yellow precious metal can also hedge against market volatility and bring your portfolio some ease to short-term price swings.
There are some fundamental components beginner investors need to know about adding gold to their portfolios. If you're wondering how to approach gold as an investment, this guide will help you navigate different strategies for being a long-term gold investor.
Table of Contents
Best Reasons to Invest in Gold
Every asset has its role to play in an investment portfolio. Stocks are invested in for growth, bonds for defense and still today, gold remains a foundational asset in an investment portfolio for wealth preservation. Rather than seeking outperformance, gold serves as a component in a balanced, diversified long-term investment portfolio.
5-Year Performance Comparison
While the S&P 500 has returned about 14% over five years, showing how stocks represent long-term growth with higher risk, the SPDR Gold Trust ETF (GLD) returned about 5.5% over the same period. Gold is a more stable asset that offers stability and protection against volatility—the tendency for market prices to change rapidly and unpredictably.
Lower Risk Profile
Gold's lower volatility means lower risk, lower reward. This trade-off ensures your money retains its value over time, making it an essential wealth preservation tool.
No Income Generation
Gold doesn't provide dividends or interest rates, but this isn't a disadvantage—it's not gold's purpose. Gold is a wealth preserver and the standard for saving cash against inflation.
Long-Term Appreciation
As gold prices increase over the long run, investors can secure profits while maintaining portfolio stability.
Gold Protects the Value of Your Money
The number one reason why people invest in gold is to protect their money from losing value over time. The primary use for gold as an investment is for wealth preservation.
Market Stability During Crisis
Global markets are subject to volatility, but gold has served its purpose as a stable asset through both challenging and prosperous times. When traditional investments face uncertainty, gold typically maintains its value or even appreciates.
It is unlikely that people would put all of their money in gold in hopes of seeking outperformance. Rather, gold is a component in a balanced, diversified long-term investment portfolio that provides the stability needed to weather economic storms.
Gold Is the Preferred Inflation Hedge
One of the defining characteristics of the global economy in a post-pandemic era is rising inflation. Inflation in the U.S. was recorded at 7% for 2021, the highest reading in more than 30 years.
Understanding Inflation's Impact
Inflation is the gradual rise in prices of goods and services in an economy. Another way to describe inflation is when money loses its purchasing power (so goods and services cost more). In response to rising inflation, the Federal Reserve is expected to raise interest rates, but real rates remain in negative territory.
Gold has intrinsic properties that make it uniquely positioned to be the standard hedge against inflation:
- Scarcity - Limited supply cannot be artificially increased
- Physical asset - Tangible value independent of digital systems
- Rarity - Natural scarcity gives it monetary value
- Store of value - Maintains purchasing power over time
Money Supply Relationship
In theory, when there is more money—compared to the supply of gold—circulating in the economy, the price of gold tends to increase. Inflation is the result of an increased money supply and gold is a hedge against inflation. As money supply grows, gold prices increase, and vice versa.
Central banks around the world influence how much money is circulating in the economy through interest rates. In response to the pandemic, central banks lowered interest rates to stimulate the economy while increasing money printing, resulting in increased money supply and inevitable inflation.
3 Ways to Invest in Gold
In the era of financial technology there are multiple ways to buy, sell, and invest in gold in addition to the traditional route.
1. Physical Gold
If you want to have direct exposure to gold, you can invest in physical gold through bullion or coins. This is a great way to manage and protect your gold the way you prefer without a third party.
- Direct ownership and control
- No counterparty risk
- Buy from reputable sources for quality assurance
- Store in safety deposit box or home safe
When going this route, it's important to buy from a reputable source that sells gold with the utmost quality. Preserving the quality and condition of physical gold will maintain its price value.
2. Gold Stocks
Owning shares of gold mining publicly-traded companies is another popular way to invest in gold long-term. Gold mining companies own mines in different locations around the world, producing and selling gold.
- Companies like Newmont, Barrick Gold Corp
- Franco-Nevada Corp and others
- Focus on production and sales growth
- Stock performance based on business operations
If these companies perform well on their earnings, their stock value can increase, benefiting shareholders through both stock appreciation and exposure to gold price movements.
3. Gold ETFs
Another popular way to get exposure to gold is through gold exchange-traded funds. Gold ETFs invest in physical gold bullion to follow the value of gold, giving investors the benefits without owning the physical asset.
- More flexible investment option
- No storage or maintenance concerns
- Easy to buy and hold through brokers
- Popular options: SPDR Gold Shares (GLD), iShares Gold Trust (IAU)
This investment vehicle is seen as more flexible since you don't have to worry about storing and maintaining physical gold.
3 Gold Investing Strategies
1. Strategic Allocation
Allocation is the act of distributing something. In financial terms, it means choosing how much money to put toward each of your investments. The first step in incorporating gold into your investment portfolio is deciding how much you want to allocate to the precious metal.
Keep in mind that gold is mainly a portfolio diversifier that is uncorrelated to conventional assets like stocks and bonds, which helps it manage portfolio volatility. If you are an aggressive investor seeking portfolio growth, you probably want a lower allocation toward gold so it doesn't interfere with your overall portfolio's purpose of higher growth.
2. Dollar Cost Averaging
If you choose to invest in gold through stocks or ETFs, a simple investing strategy is dollar cost averaging. This involves adding to your investment position on a consistent basis with a certain amount of money each time.
For example, you can invest $500 in a gold mining ETF on a monthly basis. The amount you choose to invest depends on how much you can afford. This can easily be done through your brokerage account and if you choose to automate the dollar cost averaging strategy, you don't have to worry about money transfers, buying and selling the asset.
3. Gold in Your Retirement Account
For those who are taking a self-directed approach to retirement, you can invest gold and other precious metals in an Individual Retirement Account or an IRA. This is also known as a gold IRA, which is a plan that combines your IRA with investing in physical gold.
You have to buy the gold through a custodian who purchases the gold on your behalf and delivers it to an IRS-approved facility like a depository. This is a great option if you're looking to diversify your portfolio while gaining tax advantages.
Portfolio Considerations
Gold can play an important role in any investment portfolio or retirement account. The key is finding the right balance for your individual financial goals and risk tolerance. Consider consulting with a financial advisor to determine the optimal allocation for your situation.
Getting Started with Gold Investing
The value of gold has been maintained for thousands of years. This safe haven asset is one of the most popular investments that is a part of many investors' portfolios. If you are new to gold investing, it's important to understand the characteristics of gold and how it can help stabilize investments during times of volatility, economic instability and inflation.
Investment Flexibility
There are a variety of ways to invest in gold, whether it be owning physical bullion or coins, gold mining stocks or gold ETFs. Choose exposure to the precious metal that suits your investing needs.
Market Timing
Considering some of the challenges our economy is facing today, now may be the ideal time to become a buy and hold gold investor. Monitor gold prices to identify optimal entry points.
Diversification Benefits
Gold's uncorrelated nature with traditional assets makes it an excellent portfolio diversifier. Even a small allocation can significantly reduce overall portfolio volatility.
Long-Term Perspective
Gold investing works best as a long-term strategy focused on wealth preservation rather than short-term gains. Think decades, not months, for optimal results.
Next Steps
Ready to start your gold investment journey? Begin by determining your ideal allocation percentage, choose your preferred investment method, and consider starting with small, regular purchases through dollar-cost averaging. Explore physical gold options to get started with direct ownership, or research gold ETFs for a more hands-off approach.