Is Gold a Safe Investment Now?
Investors have flocked to gold to hedge against inflation and stock market volatility in 2023. But with inflation at elevated levels, a weakening economy, and rising interest rates, there are a wide range of factors that can impact the price of gold. That’s why it’s important to assess the current state of the gold market and how certain circumstances can influence its performance.
Like the proverbial gold in a vault, physical gold can safeguard your investment funds.
Gold has historically been regarded as a safe investment, protecting the value of investor capital. Allocating money toward gold has been a normal course of action, especially during times of economic uncertainty. Yet investors may still be wary over whether gold is a safe place to park their money right now. This is particularly relevant given the evolving state of economic affairs in the U.S. and around the world.
Reasons Why Gold Is Safe Now
Gold has some of the most favorable characteristics investors seek in any kind of investment. These make it a strong contender to have in an investment portfolio during good and poor economic conditions. As investors around the world make sense of the fragile economic state we live in today and forecast where it’s headed next, they seek out securities that have these strong characteristics and should be a safer bet. Here are some of the reasons why gold is a secure investment to own right now:
Gold Is an Inflation Hedge
Gold is considered one of the best inflation hedges of our time because its value tends to increase as inflation rises. This is because gold is in limited supply. When demand for the precious metal increases while its supply stays the same or is slower to increase, the gold price is pushed up. This is a standard ‘supply and demand’ economic principle.
For added context, in today’s economy, inflation or the rise in prices of goods and services, is at very high levels. When it costs more to buy things, the value of the U.S. dollar declines. Consumers have to spend more dollars today for something that was less expensive a few years prior. As a result, the dollar has been getting weaker.
Investors can enjoy peace of mind with a solid foundation of owning gold.
But if investors have some of their money in gold they can minimize the impact of inflation since gold’s value rises with inflation. While gold may not be the ultimate solution, it may certainly lessen the blow of inflation. It’s important to keep in mind that like any other investment, gold is subject to price volatility. If inflation stays as high as it is, gold may not perform as the greatest inflation hedge in the future.
Gold Is a Store of Value
Another reason why gold is considered a safe investment now is because it is a store of value. It retains its value overtime. Gold is a strong store of value because:
- it’s in limited supply
- it's a durable precious metal
- it's considered a safe haven asset during time of geopolitical instability
- it can easily be bought and sold in financial markets all over the world
Since the value of gold is not tied to anything other than itself, its value is not subject to the same risks as other assets.
What Makes an Investment Safe?
One might consider a certain type of investment safe while another may not, depending on the investor profile. However, Investments characterized as being safe are considered to be low risk with little volatility. Moreover, they can hold on to their value in any type of economic climate and have liquidity, meaning they can easily be converted into cash.
For example, certificates of deposit or CDs provided by banks or credit unions are a safe way to manage money for a short period of time. CDs are considered a low-risk tool because they’re backed by the Federal Deposit Insurance Corporation (FDIC). The FDIC guarantees each account holder is insured up to $250,000.
Similarly, U.S. Treasuries are considered safe investments because U.S. Treasury bonds are issued by the Department of Treasury. Investors buy bonds from the U.S. government who guarantees to pay investors back with interest. Bond holders tend not to question the risk of bond investments since they’re backed by the full faith and credit of the U.S. government.
Treasury bonds are a traditional safe haven, but have also experienced high volatility recently.
Some precious metals like gold have these characteristics as well. Gold has a track record of being a stable security that has demonstrated price appreciation over the course of history. At the same time, the value of gold may be subject to short-term volatility. There are longer-term material macroeconomic issues that could limit its potential as well.
Reasons Why Gold Might Not Be Safe
Instead of thinking of gold as an “unsafe” investment, it’s probably better to consider that in some circumstances, gold may not serve some investors who may be looking to make high returns. Other investments like stocks or real estate, for example, can have a higher return on investment. This is because they tend to generate income in the form of dividends or rental income, whereas gold does not provide any income or yield. Rather gold preserves the value of your money.
So, investors who hold gold must rely on the price of gold increasing to get a return on investment. Furthermore, gold is known to be a good portfolio diversifier which limits risk. Yet if an investor allocates too much in gold, that could leave you diversified too much, leaving you with increased risk.
A reasonable level of portfolio diversification will improve the risk profile of your investments.
Gold has historically been a great asset to diversify an investment portfolio with. Still, its success as an asset depends on many factors. Given the sensitive state of the global economy, it's questionable that gold can single-handedly serve the troubles that plague investments right now.
Gold may seem to be an attractive investment to help resolve the challenges present in our world today. These include high inflation, wars between nations, and weaker economies. However, given the magnitude of these risks, gold may have limited potential.
Importantly, what one investor considers safe, another investor may consider risky. So, whether gold is a safe investment right now also depends on an investor's risk profile, investment goals, and overall portfolio strategy. For some, gold may be a way to diversify their assets while for others, it may not be the best way to reduce risk. Investors should carefully weigh the potential benefits or setbacks before making a decision to invest in gold.
Written by Paulina Likos
Read more about investing in precious metals from the author:
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