Gold can serve as an effective diversifier during times of market instability; but before adding it to your portfolio, meet with a financial advisor first.
Gold is an unproductive asset, unlike shares, bonds or deposits which produce income; therefore it will limit your earning power over time.
It is an unproductive asset
Gold has long been promoted as an inflation hedge and store of value, but history shows it to not fare so well in periods of economic stability and growth. Instead, smart investors opt for investments with tangible returns like quality productive assets to put their money to work and generate returns from them.
Physical gold requires storage and insurance costs, making it a costly investment. Furthermore, its handling and transportation can be challenging and awkward; finally, gold does not produce dividends or interest payments, so it should only be seen as an additional portfolio diversification strategy.
Investors should keep in mind that a weakening dollar can have an upward influence on gold prices as central banks sell off U.S. dollars to purchase this precious metal. But its price remains volatile and can fall significantly, so investors should carefully consider their time horizon before investing in gold so as to wait out significant price drops before selling your holdings.
It is a speculative asset
Gold is an attractive investment vehicle, thanks to its perceived value as both a store of wealth and hedge against inflation. But before adding gold to your portfolio, some things should be kept in mind; one being that unlike stocks and bonds it does not generate income and typically offers lower returns over time.
Physical gold can be costly to buy and sell, with dealers charging commission on both ends of a transaction – this can significantly eat into any potential profits, especially if selling at a loss.
Gold investments may add complexity and diversification to your portfolio, helping mitigate losses during times of economic turmoil. But remember, gold does not provide an income stream – its price will only appreciate with time. Before adding it to your portfolio, make sure it fits with your risk tolerance, goals and time horizon.
It is not a hedge against inflation
Gold has long been seen as an effective hedge against inflation, increasing in value as the purchasing power of dollars wanes. Unfortunately, this perception may be false: although gold prices do often rise during periods of inflation, this does not guarantee it will outperform stocks or other assets.
Some investors turn to physical gold investments to hedge against inflation, yet may lose money as a result. Purchasing physical gold involves fees such as premiums and commissions which reduce overall profit. Furthermore, investing in physical gold through funds means paying custodian fees and expenses which eat away at profits further.
Investors often overlook the opportunity costs of owning gold and the storage issues it creates, which is why consulting a financial advisor before changing your investment portfolio can provide objective opinions regarding gold’s role in it.
It is a risky investment
Gold investments can be considered risky investments, since it doesn’t generate income like stocks and bonds do. Furthermore, investing in physical gold incurs additional costs like storage and insurance fees that may lower returns significantly.
Gold may not provide an effective hedge against inflation. Gold prices often spike during periods of economic distress, yet its performance as an inflation hedge remains mixed compared with that of stocks over most standardized timeframes dating back three decades.
Diversify your portfolio, not overinvest in gold, to avoid missing out on potential gains from other assets. Set clear goals and stick to them when investing, to help avoid making hasty decisions impulsively. Also consider giving some assets away to charity or friends as potential ways of giving back.