1. With financial uncertainty on the rise, people are jumping into gold ( GC=F ). And gold is reacting to recent all-time highs. However, if you start tracking the price of gold, you will see it falls as fast as it rises.
2. Gold prices are volatile. If you want to invest in gold, you need to be comfortable with it.
3. Gold doesn’t behave like cash, stocks, or bonds — and that’s exactly what you’re looking for in an alternative asset. Let’s explore what you need to know by explaining the four-step gold investing process.
Step 1: Set your goals
Gold's defining characteristic is its ability to retain its value or even appreciate when other assets decline. Investors often use this behavior as a stabilizer. They rely on gold's strength in fragile weather conditions to limit unrealized losses in stocks and inflation-related declines in the purchasing power of their savings.
Gold is also a widely recognized store of value. As such, the precious metal has the potential to become a medium of exchange if the dollar collapses. In this sense, “gold is an insurance policy” against economic disaster, according to Scott Travers, author of The Coin Collector's Survival Manual and editor of COINage magazine.
Given gold's historical behavior, three suitable investment objectives for a gold position are:
Diversify into an asset that moves independently of stock prices
Protection against inflation-related loss of purchasing power
A reserve of value and wealth in an unlikely economic collapse
Step 2: Set up allocation
Allocation is the composition of your portfolio across different asset classes, such as stocks, bonds, and gold. Setting an allocation target for each asset class helps you control risk over the long term. This is because asset values change over time. For example, stocks increase in price. Unless you periodically rebalance your holdings to restore your allocation target, price increases can cause you to be overly concentrated in stocks.
Travers recommends holding 5% to 15% of your net worth in gold. Other experts recommend holding up to 20% if you can tolerate the risk. Considering the historical behavior of gold based on your risk appetite will help you determine the appropriate allocation.
Historical behavior of gold
Historically, gold has shown long cycles of growth and decline. The precious metal was in a growth phase from 2009 to 2011. It then trended down, failing to set a new high for nine years.
During the bad years of Gold, your position will negatively impact your overall investment returns. If that seems like a problem, then a lower allocation percentage may be more appropriate. On the other hand, you may be willing to accept years when Gold underperforms so that you can benefit more in the good years. In this case, you can aim for a higher percentage.
The precious metal has been in the news lately, and many analysts are bullish on gold. In February, Goldman Sachs projected gold to rise another 8% by 2025, after rising more than 40% in 2024. Gold prices have already surpassed that 8% mark. Concerns about tariffs and their impact on the U.S. economy are a major factor.
Step 3: Select a form
Once you have determined your gold allocation goals, you need to choose a form of gold to hold. The three options are physical gold, gold mining stocks, and gold ETFs.
Advantages of physical gold
Physical gold includes jewelry, gold bars and gold coins. The advantages of physical gold include:
Peace of mind. If you keep physical gold at home, you can use gold as a medium of exchange in case of economic emergency.
No additional volatility or ongoing fees. Gold mining stocks tend to rise and fall with the price of gold, but business-related factors add to their volatility. Gold ETFs charge an administrative fee in the form of an expense ratio.
Disadvantages of physical gold
Disadvantages of physical gold include:
Risk of theft or loss. Physical gold must be properly secured. Whether you store it at home or in a vault, it can still be stolen. In October 2024, a federal jury found Robert Leroy Higgins guilty of fraud after $50 million worth of precious metals disappeared from his business, First State Depository.
Less Liquid. Physical gold is less liquid than stocks or ETFs. If you don’t use gold as a medium of exchange, you may need to find a dealer and pay more when you sell.
Advantages of gold mining stocks
Owning shares in gold mining stocks provides indirect exposure to gold. The advantages of mining stocks over physical gold include:
Higher liquidity. Large-cap gold mining stocks like Barrick Gold Corporation ( GOLD ) and Franco-Nevada Corporation ( FNV ) tend to have tight bid-ask spreads, which is a sign of liquidity. The bid-ask spread is the difference between the price a buyer will pay and the price a seller will accept.
Easy to store. Stocks stay in your brokerage account and don't take up physical space. In normal times, this is an advantage. In an economic disaster, this can be a disadvantage if brokerages or stock markets temporarily close.
Step 4: Consider your investment time horizon
Once you have chosen the size and type of gold investment, consider your investment time horizon as a final suitability check. Gold can be volatile. Gold has also demonstrated long periods of decline. Such behavior is not acceptable if your time horizon is short. The risk that the price of gold will fall when you need to liquidate is too great.
Longer holding periods also offer greater potential for achieving your goals. For example, hedging against a stock market decline or inflation is a long-term endeavor. These outcomes will continue to be a risk as long as you own stocks or deposits. Holding gold as insurance against economic disaster requires you to hold the asset until you need it.
Gold as a safety net
A small gold position can act as a stabilizer for your stock portfolio and your purchasing power. If you choose physical gold stored at home, it can also act as a currency during the worst economic crises. Just know that gold has historically underperformed stocks, so choose your target allocation accordingly.
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