Investing

Before you invest in gold, here's what you need to know about precious metals and your portfolio

A staff member shows gold ornaments at a jewelry store on June 21, 2019, in China.
VCG | Visual China Group | Getty Images

Your investment portfolio, experts agree, should include a curated mix of stocks and bonds. And some investors find that adding a little glitter can be a good idea, too.

Gold prices have been on the rise since late November. They're up more than 3% this week alone — and have reached a seven-year record, trading at around $1,620 per ounce. That's the highest gold prices have been since the fall of 2011, when the market topped out at more than $1,870.

Gold is generally seen as a safe-haven investment: Prices tend to increase when investor demand spikes during times of geopolitical or economic uncertainty.

And this recent surge is no different, reflecting trader concerns about a possible slowdown in the market if the spread of coronavirus out of China affects global economic growth. Earlier this year, tensions between the U.S. and Iran were behind another spike in gold prices.

But is it smart for ordinary people to think of gold and other metals as investments, and are there safe ways to include them in your portfolio? Experts explain.

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'Gold is a good alternative currency'

Gold, silver, and other precious metals are, in many respects, the original investment. People have been digging up and refining precious metals for more than 6,000 years. The search for gold opened up the New World in the 1400s and 1500s, establishing trade routes to North and South America. Later, gold prospectors packed up and headed to states like California and Alaska in the mid-1800s and ended up settling in great swaths of the U.S. West.

Centuries later, precious metals haven't gone out of style. These days, this mostly refers to gold and silver, but can include platinum and palladium, which are generally used as components in manufacturing.

Some modern-day investors like precious metals for the same reasons their ancestors did: Because they can seem like "the ultimate form of wealth," Jeff Clark, senior precious metals analyst at GoldSilver.com, an online precious metals dealer, told Grow in December. Clark says that there are two primary reasons that investors are attracted to gold, specifically: Gold is traditionally the strongest way to store wealth, and it's also "a hedge" — that is, when other investments lose value, gold tends to appreciate.

"Gold is your Iron Man suit," he says, as it can provide investors a refuge when markets decline. For example, gold and silver prices climbed last year as uncertainty about the ongoing trade war with China led to bumpy patches in the stock market. Fears about a decline were unfounded, though, as the market gained nearly 29% in 2019, and experts say they're expecting continued growth in 2020.

In a general sense, though, when investors get spooked, they sell stocks and buy investments like precious metals. "It's something people flock to when they're uncertain of the markets," Katie Brewer, a Dallas-based certified financial planner who runs the financial firm Your Richest Life, told Grow in December.

In the past, Brewer says, precious metals were a staple in a lot of portfolios. "Investors had to have precious metals because that's the only thing that kept any of its value," she says.

Many experts were expecting gold prices to go up in 2020 even before tensions with Iran surfaced, however. For example, David Roche, president and global strategist at Independent Strategy, told CNBC in October that gold could top $2,000 per ounce in 2020 due to lower interest rates.

"Gold is a good alternative currency because it's safe, and because it costs nothing to own it," he said.

The advantages and drawbacks of gold

Aside from being a relatively "safe" investment, Clark says gold has a few other advantages. For one, it's physical, so you can actually store it in your home if you want to. Second, it can't be hacked or erased. And third, it has no counterparty risk — the risk that another party could default on their obligation, like a bond-issuer failing to pay a bond-holder — that could affect its value.

There are drawbacks, too. Because gold is a tangible investment, you may have to find a place to store and protect it. And there are transaction costs associated with it, such as having to refine it into jewelry or bars.

Brewer says that investors should keep in mind that precious metal prices tend to be very volatile. Wild price fluctuations aren't uncommon. She says investors should also remember that physical precious metals aren't liquid assets — it isn't always a quick and easy process to sell them if you need to tap into the equity.

There are also numerous scams targeting gold investors — and experts say those tend to be more prevalent when gold prices are high. Gold expert Scott Travers, a New York-based gold coin dealer, told CNBC's "American Greed" that telemarketing scams selling fictitious gold are common, as are unscrupulous gold dealers who low-ball people hoping to sell items like jewelry or coins.

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How to invest in gold and precious metals

There are numerous ways to invest in precious metals, both through the stock market or by purchasing the metals themselves.

Invest through the stock market. There are ETFs that give investors exposure to precious metals. You don't actually own the metals themselves, Clark warns, but rather shares in a trust. You can also buy shares of companies in the mining and refining industry.

Purchase the metal itself. If you'd rather buy a physical investment, you can purchase gold, silver, and other metals at a dealer either in person or online. Clark says that gold bars and coins are generally 99.99% pure gold. Because they've gone through a refining process, they can cost more upfront. Then, of course, you need to have a safe place to store them.

Brewer warns that your focus as an investor should remain, overwhelmingly, on stocks and bonds. Make sure you've covered all of your bases and built a diversified portfolio, she says, before even considering alternative investments like precious metals. Even then, they should represent only a small percentage of your total holdings.

That said, experts point out that incorporating some precious metals can help you diversify a portfolio that's primarily composed of stocks and bonds, especially with some economists warning that the economy could slow down this year.

Jim Cramer, for example, touts the benefits of investing in precious metals. "If you're looking for an insurance policy against volatility and economic uncertainty, gold is a great way to go," he said on CNBC's "Mad Money" last year. "I always advocate owning at least a little as insurance against the unknown."

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