3 Advantages and 4 Disadvantages of Investing in Gold

Investing in gold has its pros and cons, and whether it’s the right choice for you boils down to your appetite for risk. On one hand, gold is a tangible asset that can protect you in uncertain times, but it doesn’t offer the same steady growth potential as stocks or bonds. 

Keep reading because we’ll list the main advantages and disadvantages of investing in gold to help you decide what the best option for your investment portfolio is. 

3 advantages of investing in gold

Gold has been a cornerstone of modern investing since the mid-1970s. Gold’s value lies in its ability to outperform currencies, stocks, and bonds during inflation. Investors are attracted to it because of its demand. Here are three of the most compelling advantages of investing in gold.

1. Gold is a hedge against inflation

The price of gold tends to rise when the value of paper money starts to decline. The greatest example of this is the devaluation of the U.S. dollar by nearly 10:1 from 1970 to 1980 after the U.S. abandoned the gold standard, meaning the value of the dollar was no longer tied to the price of gold. Gold soared from $35 to $350 per ounce and then again climbed from $350 to $850 per ounce. 

Since then, investors have turned to gold during inflation or times of economic uncertainty. Gold becomes more valuable when the pressures of inflation erode the value of bonds and cash. Historically, gold has proven its worth time and time again. 

2. Gold investments diversify your portfolio

In 2008, during the financial crisis, the stock market crashed while gold prices rose. Investors who held gold were able to reduce their risks, while traditional assets, such as stocks and bonds, fell. In other words, investors who held gold were protected. 

Including gold in an investment portfolio protects you from future large market fluctuations. Its short-term market price is volatile but it offers diversity and stability over a long period.   

3. Gold is a safe haven 

Many investors view gold as a safe-haven asset. During the COVID-19 pandemic, gold prices hit a record high as investors worldwide searched for a secure asset to park their wealth. Gold is recognized as valuable, and past trends show that holding it during a collapse makes for low risk and high return. 

Other advantages of gold are:

1. It’s a universal asset, so no matter what country you are in, it can behave as a medium of exchange and can be bought or sold in markets all over the world.
2. Gold is not tied to a company or other institution that could affect its value.

Erin Kinkade, CFP®

4 disadvantages of investing in gold

Gold is a terrific way to diversify portfolios and is valuable, but it has its downsides. For one, physical gold doesn’t act like a stock or interest-bearing bond. Holding physical gold comes with costs and security concerns. Short-term risks are associated with gold investments caused by its volatile market price. 

For all its face value, it’s crucial to understand gold’s drawbacks before deciding to invest. 

1. Gold doesn’t generate passive income

Some stocks pay dividends, and bonds pay interest, but gold doesn’t generate any passive income. You won’t necessarily benefit from holding gold If you are an investor who relies on financial instruments as an income stream. Gold’s value is unrealized gain, meaning you only gain when you sell.

This doesn’t mean it shouldn’t be in your portfolio. But in stable times, it won’t yield any immediate benefits.

2. Owning gold comes with additional costs 

Owning physical gold comes with additional costs and responsibilities. Storing physical gold requires you to purchase a home safe, rent a safe-deposit box, or pay to store it in a secure depository. Then you must also buy insurance to protect it against theft. These fees become an ongoing expense that will affect your profits.

3. Gold’s price is volatile 

Gold is a good long-term investment that guards against economic downturns. But in the short term, its price is volatile and can experience significant market fluctuation. To take an example from above, during the COVID-19 pandemic, gold’s price soared—but it also dropped in 2020 after the initial panic calmed. Gold’s price is susceptible to changes in interest rates and investor sentiment, which makes it less predictable than many other investments. 

4. Capital gains tax

The IRS considers gold a collectible, which means it is taxed at a higher rate than other investments. The long-term capital gains tax on stocks and bonds is between 15% and 20%. You can expect to be taxed as high as 28% on your gains when you sell gold. That 8% to 13% difference is substantial enough to affect your return on investment. 

Additional disadvantages I would consider are:

1. Adding to the short-term volatility mentioned, gold is best suited as a long-term investment. 
2. Liquidity: Although it is a globally accepted asset, finding ways to sell physical gold can be a hassle in times of need. 
3. You’ll pay transaction costs and storage costs for physical gold (specifically if held in an IRA), and it is subject to regulatory risk (like all other assets) where rules and tax treatment can change.

Erin Kinkade, CFP®

How do you invest in gold?

You have many options to invest in gold, and each carries its own risks and rewards. Here are some of the main ways to invest in gold for your retirement: 

1. Physical gold: This includes buying gold coins, bars, bullion, and jewelry and investing in a precious metals IRA. You can store most of it at home or in a depository, and it gives you direct ownership of the asset. 
2. Gold ETFs and mutual funds: Exchange-traded funds (ETFs) and mutual funds give you access to gold without storage fees and insurance. These funds track the price of gold or invest in gold mining companies. 
3. Gold stocks: Buying shares in a company that mines or produces gold is another option for investors. Gold stocks give you the benefits of the company’s profits plus the changes to the price of gold. 
4. Gold futures and options: Futures and options are contracts that let you speculate on the future price of gold. These can pay out high returns, but they are also high-risk and only recommended for experienced investors. 

Should you invest in gold?

The answer to this question mainly depends on your financial goals and your appetite for risk. Investing in gold offers clear advantages, but it’s not for everyone. If you are looking for quick returns or passive income, you should explore other options. 

Here are several scenarios to help determine whether gold is right for you:

Scenario	Invest in gold?
You want to guard against inflation	✅ Yes
You want to diversify your portfolio	✅ Yes
You want your investment to generate income	❌ No
You need liquidity or quick returns	❌ No
You are looking for a safe haven for your wealth	✅ Yes

When is gold a good investment?

• Gold is a good option for protecting your purchasing power and guarding you against inflation.
• Gold is an excellent investment for your portfolio when your other assets, such as stocks and bonds, experience volatility. 
• Gold is a solid choice as a safe haven for your wealth during an economic crisis.

When is gold not the best option?

• Gold isn’t the best option if you are looking to earn dividends or interest.
• Gold is not the right option if you’re looking for quick returns because its price is volatile in the short term.
• Gold isn’t the best choice if you need immediate cash because it’s less liquid than other assets. 

If you’re thinking about investing in gold, it’s important to consider your time horizon. Gold is best suited for long-term holdings—think five to 10 years or more. If you’re not planning to hold onto it for that long or if you already have a significant portion of your portfolio in gold or similar assets, it may not be the right option for you.

On the other hand, if you’re looking to hedge against risks, diversify your portfolio, and are comfortable with the pros and cons of gold, it could be a smart choice. Just make sure you understand how to invest—whether that’s through a taxable account or an IRA, and whether you’re considering physical gold or ETFs. It’s also crucial that gold fits within your overall risk tolerance and investment strategy.

Erin Kinkade, CFP®

Tips for investing in gold

Here are four actions we recommend taking.

Choose the right method

With so many ways to invest in gold, your choice should align with your investment goals. Consider the storage fees and insurance costs if you opt for physical gold. Consider ETFs and gold stocks if your goal is lower costs and easier liquidity. 

Think long-term

Gold is most effective as a long-term investment. Short-term price changes are common, but gold historically increases in value over a long period. So buy with the intention of holding and knowing you will experience short-term dips. 

DCA

DCA (dollar cost averaging) is a convenient way to invest by creating a funding schedule. For instance, rather than spending $20,000 on gold today, you could spend $2,000 per month for 10 months. This is a proven way to reduce fees and manage risk. 

Balance your allocation

Investors recommend allocating 5% to 15% of your portfolio to gold to manage the risks without sacrificing growth. This strategy allows you to benefit from exposure to gold while leaving room for other assets, including growth stocks, dividend stocks, and interest-bearing bonds.