The Pros and Cons of an Investment in Gold

The Pros and Cons of an Investment in Gold

Precious metals are on the rise again.

With the price of gold hovering around $1,300/ounce, we are getting a fair amount of inquiries about investing in it (and other precious metals). Generally, these questions arise when these asset classes are on the rise or when there is a lot of global uncertainty.  These days we have a bit of both, so it’s a great time for some clarity on the question.

Let’s start with the Pros and Cons of investing in the gold (and other precious metal) asset class.

The Pros:

  1. Perhaps the biggest Pro of buying gold is to hedge against deflation, while also helping a portfolio fight potential inflation. There are studies that show gold historically grows with inflation, with the 1970s often given as a prime example. Investors, rather than parking a large sum of money in a bank account that will generally grow less than inflation, will purchase gold to maintain one’s buying power.  Subsequently, during deflationary times when consumers lose faith in government and the economy, they flock to a proven store of value in gold (e.g. the Great Depression).
  2. Gold is generally viewed as a safe haven investment because of the days where the US dollar was fully backed by gold. During times of extreme market uncertainty, a huge influx of money flows into gold (which tends to lead to appreciation or “supply equals demand”).  Although there is substantially more US currency than gold these days, the old mentality as a safe haven remains.
  3. Gold is a tangible investment which generally holds its intrinsic value. The notion is: if the global economy collapses, gold (and other metals) will hold their value.
  4. Gold is another way to diversify a portfolio and act as an equity hedge.

The Cons:

  1. In the doomsday scenario of a global economic and currency collapse, who is to say metals will be the default currency? What if “value” is determined by bitcoin or barter?   This is the common doomsday rationale of heavy metal investors.
  2. Investing in gold will not produce any income (such as interest from bonds or dividends from stocks).
  3. As a stand-alone investment, it is highly inefficient. The long-term expected return of gold is right about at inflation. But, it comes with a disproportionate amount of risk.
  4. For the return, gold has a high amount of volatility. Usually, for the conservative investor, this is tough to stomach.  It’s very common to see a 10-15% swing in either direction.

Related: A Financial Guide for When Tragedy Strikes

Our Philosophy

Diversified has a high concentration of 50+ year old clients. We often find their needs and goals lead away from investing in gold.  Our philosophy has always been to diversify.  Risk is managed depending on each client’s specific needs, goals, and tolerance. In our experience, the needs of an investor as they approach and live through a prolonged retirement extend beyond an asset class like gold.

We fully believe that there are ways to hedge against equities that yield better long-term growth potential and provide investment income with a lower amount of risk. This is not to say that the benefits of owning physical gold listed earlier aren’t valid, but we feel there are more efficient and less volatile ways to accomplish those objectives.

Andrew Rosen
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In March 2010, Andrew Rosen joined the Diversified team, bringing with him nine years of financial industry experience. In his role as Advisor, Partner, Andrew forge ... Click for full bio

Most Read IRIS Articles of the Week: March 19-23

Most Read IRIS Articles of the Week: March 19-23

Here’s a look at the Top 11 Most Viewed Articles of the Week on, March 19-23, 2018

Click the headline to read the full article.  Enjoy!

1. Multi-Factor or Not Multi-Factor? That Is the Question

Let’s pretend you are a US investor that wants to deploy some of your money overseas.  You think international developed market stocks are attractive relative to US stocks, and you also think the US dollar will decline over the period you intend to hold your investment.  — Chris Shuba

2. The Lies Spread by Bankers About Cryptocurrencies

I had a chat with The Financial Times the other day, and provided lots of background as to why I don’t think cryptocurrencies are the choice of criminals. The comment that was reported was the following ... — Chris Skinner

3. Alternative Investments? You May Need New Shock Absorbers!

During the tumultuous red and green gyrations of the capital markets this year have your clients anxiously called to ask: “What’s going on with my portfolio?” What do you do when the usually smooth ride in your luxury automobile becomes as bumpy as Mr. Toad’s Wild Ride in the Happiest Place on Earth? What does the average investor do? — Ted Parker

4. Why Fear of Inflation Is Rattling Investors

Inflation is a bad thing, right? It make things more expensive, right? For those of us of, let’s say, a certain vintage, we recall the runaway inflation of the late 1970’s and early 1980’s. So why does the Federal Reserve – in charge of managing the country’s currency and value thereof – actually try to create inflation? It’s called the inflation targeting and it matters to your money. — Bill Acheson

5. The Best Retirement Investments for a Steady Stream of Income

As you near your 60’s, your prime earning and saving years will transition into a period of time where you get to enjoy the “fruits of your labor,” a.k.a retirement. We call this segueing from accumulation to decumulation, the period when you will be drawing from your accumulated nest egg. Dana Anspach

6. An Emerging Theme In Thematic Investing

Exchange traded funds (ETFs) are popular vehicles for market participants looking to engage in thematic investing. Thematic investing looks to take advantage of future growth trends, including disruptive technologies. Given that forward-looking approach, stock-picking in the thematic universe is equally as hard, if not harder, than in traditional market segments. — Tom Lydon

7. 8 Winning Questions You Should Be Asking Every Prospect

It’s not enough for your salespeople to be product experts, they also need to be capable of having the kind of conversations that position them as business experts and even strategic resources. — Lisa Rose

8. 10 Steps to Successful Strategic Alliances

Business growth doesn’t come from wishful thinking. As you know, it takes a lot of hard work. The growth of your business is not an option – it is a necessity. Coordinating the right mix of strategies to gain market share and improve client acquisition rates is essential to advance your firm in today’s economy. — Michelle Mosher​​​​​​​

9. Keep It Light: Harnessing Humor for Financial Marketing Success

It’s undoubtedly true that investors’ financial security is no laughing matter, and this is reflected in the stolid, dour, reliable imagery and branding that is, by and large, the industry standard. This is hardly surprising—investors need to believe they’re placing their hard-earned money in the hands of experienced, trustworthy professionals. — Alexandra Levis​​​​​​​

10. Do the Economics of a Move to Independence Really Add Up?

The number one question advisors ask when exploring a move to independence is how the economics compare to accepting a recruiting package from a major firm. It’s certainly a valid concern, because while the recruiting deals being offered by the wirehouses are down, it is still very possible for a top advisor to get a really attractive hard-to-pass-up offer. — Mindy Diamond

11. Four Big Reasons Why Short-Term Muni Bonds Should Excite You

Municipal bonds might not be the first thing that comes to mind when you think of a sexy investment. They don’t typically command news headlines like the stock market or bitcoin. — Frank Holmes

Douglas Heikkinen
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IRIS Co-Founder and Producer of Perspective—a personal look at the industry, and notables who share what they’ve learned, regretted, won, lost and what continues ... Click for full bio