Decided to stake part of your portfolio on the shiny yellow stuff? Doing so is actually pretty straightforward, but there are some things you need to know before getting your gold bug on.
2 big reasons to invest in gold
1. To diversify your overall portfolio. Because the price of gold typically doesn’t move in the same direction as other types of investments such as stocks or bonds, it can smooth out your returns when other types of investments are tanking.
But investors should be wary of putting too much of their money in gold, says Cary Guffey, CFP professional and CFP Board ambassador.
“The most important part is, how does it fit into your financial plan?” says Guffey. “It is not something you want to get over-concentrated in because it can move against you.”
A good rule of thumb is having no more than 5 percent of any one commodity in your portfolio, he says.
2. To hedge against inflation or a weakening currency. Because gold is recognized all over the world as a store of value, its price generally doesn’t move in the same direction as any one country’s currency, Guffey says. That means that even if inflation or some other force is pushing the value of your dollar down, gold will retain its value and buying power as part of your portfolio, he says.
Things that can drive up gold prices
If gold prices are going up, you can usually attribute it to one of a couple of factors, says Guffey:
- Investors expect high inflation. Because of gold’s role as a hedge against inflation, investors tend to pile in when they expect higher inflation.
- Falling value of a country’s currency. If people expect the value of their currency relative to commodities or other currencies to fall, they’ll tend to buy gold.
- Political or social instability: If people in a country are expecting or currently experiencing some sort of political crisis, war or act of terrorism, they’re likely to hoard gold.
- Crashing stock prices: When the markets are crashing, investors’ flight to safety pushes gold prices up.
Things that can drive down gold prices
If gold prices are heading downward, it’s usually tied to one of the following factors, Guffey says:
- Low inflation expectations: If people expect low inflation, gold demand tends to wane because people aren’t as worried about the value of their money being eroded.
- A bull market in stocks or bonds: Generally, when the securities markets are doing well or expected to do well, it drives investors to sell their gold reserves so they can put their money in more profitable investments in the securities markets.
And remember, before putting your money into any kind of gold investment, it’s a good idea to discuss your plans with your financial adviser to make sure it fits in with your overall portfolio.