The Pros and Cons of Investing in Gold

Investing is an important part of your financial life, but that doesn’t mean that it’s easy to do or that it isn’t stressful. Most securities, including stocks and even bonds, experience fluctuations in value. It’s often difficult to understand why or what drives the value of these paper securities.

One popular alternative to investments like stocks and bonds is precious metals, particularly gold. Because everyone agrees that gold is valuable, many investors see it as a hedge against inflation, declining stock prices, and political instability.

The Pros and Cons of Investing in Gold

There are many reasons for investing in gold but plenty of downsides as well. On the pro side, gold is recognized as a safe haven investment, has low long-term volatility, and is simple to understand. Negatives include potential transaction costs, storage issues, and illiquidity.


Investors like buying gold for several reasons, including the diversification it adds to an investment portfolio and the fact that it’s often seen as a hedge against market instability.

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1. Safe Haven

Gold is one of the oldest investments in the world. It has been used for decoration since prehistoric times and became a globally recognized currency several thousand years ago.

This long history has led investors to view gold as a safe haven. Stocks, bonds, and other investments might gain value or become worthless. Gold, on the other hand, has been valuable throughout human history. Most signs point to it continuing to be valuable in the future.

When times are uncertain, many investors like owning an asset with a proven ability to retain value.

2. Potential Inflation Hedge

Inflation is the erosion of spending power. When you spend $3 for the same loaf of bread your parents spent $0.50 for as children, you see the effects of inflation firsthand.

Inflation happens because central banks can increase the supply of fiat money — currencies backed by those central banks, such as the U.S. dollar — by printing more of it. It reduces the value of investors’ money, compelling them to buy assets that they believe will gain value when inflation occurs. 

The supply of gold is much more restricted than the supply of fiat money. The only way to expand it is by mining more, which is expensive and time-consuming. Plus, the world has a finite amount of gold — something no amount of mining can overcome.

Accordingly, many investors turn to gold as an inflation hedge. They do so not only because the gold supply is limited but because of the popular perception that gold is a good way to invest during inflationary periods.

However, there is some question as to whether gold is truly a good hedge against inflation. A Wall Street Journal analysis found that since the early 1970s, gold’s track record as an inflation hedge has been mixed at best.

3. Low Long-Term Volatility

One of the top risks that investors face is volatility. In the long run, stocks tend to gain value, especially if you build a diversified portfolio or buy index funds that smooth out volatility by mirroring broader stock market indexes. 

However, just because stock investments tend to gain value in the long run doesn’t mean they can’t lose 10%, 20%, or more over the short-term or medium term. This volatility is a problem for investors for a few reasons.

For starters, it’s hard to stay the course when you see your portfolio lose a significant amount of its value in a short period of time. And if you have a short time horizon for investing or need to sell your investments in a financial emergency, you might have to sell at a loss during a downturn.

Over the long term, gold has been less volatile than other types of investments, according to a IIBM Management Review paper that compared the relative volatility of gold and silver. This makes it a good option for investors who don’t like dealing with portfolio volatility.

4. Simplicity

Many people like to invest in things that they understand. 

Unfortunately, modern investments can be complicated for everyday investors. Most people know what a stock is, but it can be hard to discern what’s really driving the value of an individual share, to say nothing of derivative instruments like options contracts.

By contrast, gold is simple, and the case for investing in it is easy to comprehend. Gold is a precious metal that has been seen as valuable for a long time. People want to own it. And the limited supply of gold in the world supports the metal’s value.

5. Portfolio Diversification

One of the most important things you can do when investing is diversify your portfolio. 

If you buy shares in just a single company and that business fails, you could lose all of your money. Buying shares in multiple businesses reduces the risk you face if one of them goes bankrupt.

Adding multiple types of assets to your portfolio adds additional levels of diversification. For example, if bonds as a whole lose value, other assets might gain value.

This is due to the principle of correlation, which describes how the prices of different assets move in relation to one another. For example, stocks in a particular industry or economic sector tend to rise and fall as a whole. Likewise, oil company stocks tend to rise when oil prices rise and fall when oil prices fall.

The price of gold is not closely correlated with that of most other assets. The price of gold does tend to affect the performance of mining company stocks, but it’s not as influential in other industries and sectors. 

In other words, adding gold and other precious metals to your portfolio increases your portfolio’s resilience. It helps you offset losses in other asset classes with gains in your precious metals holdings.

6. Tangibility

Many people like to invest in tangible things that they can see. Most modern investments, like stocks, bonds, mutual funds, and ETFs are purely electronic. You own the shares, but they’re just numbers that you can see when you log in to your brokerage account.

Gold and other precious metals are tangible assets. If you want, you can buy physical gold bullion, hold it in your hand, and store it somewhere in your home. That level of tangibility is appealing to many investors who are hesitant to buy more ephemeral investments like stocks.


Before investing in gold, it’s important to know the drawbacks and to understand the unique difficulties related to investing in precious metals.

1. Cost

One drawback of investing in gold is the cost. If you’ve ever visited a jewelry store, you’ll know that gold can be expensive. In 2010, gold cost about $1,100 an ounce. Between 20210 and 2022, the value of gold climbed, reaching heights of more than $2,000 per ounce.

That high price can make it difficult to buy a significant amount of gold if you’re just starting to invest. There are also other costs associated with gold investing that don’t exist for other types of investments, such as storage and transportation. 

2. Storage Issues

Gold is a physical asset, which means that you need to have a way to store it safely and securely. That adds additional complexity to investing in gold that you don’t have to deal with when you buy other investments.

If you own gold bars or gold coins, you’ll have to store them in a safe in your home or hire a storage company to keep your precious metals safe. Buying a safe or hiring a company to protect your gold costs money. You also have to deal with transporting any gold you buy or sell to and from storage.

For example, SD Bullion charges an annual rate of 0.29% of the value of your stored gold, with a minimum charge of $9.99 per month just to hold your gold investments. If you want to take delivery of your gold, SD Bullion charges depending on weight and distance, with an additional $25 charge per -transaction.

To avoid shipping and storage charges, you can invest in exchange-traded funds that invest in gold. However, these funds also have to store gold or pay someone else to do so, which can add to their management fees. It also reduces some of the benefits of investing in gold, such as the tangibility of the investment.

3. Liquidity

Another risk of investing in gold is liquidity. If you want to buy or sell the physical metal, you need to find a person or company to trade with you. You then need to work out a deal with them and arrange transportation for the gold. 

That process can be difficult and takes longer than trading an electronic asset like a stock or bond. It’s even more inconvenient if the gold you own or want to buy has value as a particularly rare or collectible coin.

As with other illiquid asset classes, such as real estate and collectibles, precious metals markets are characterized by pricing inefficiencies and high transaction costs. While you can alleviate gold’s liquidity issues by investing in gold ETFs, that eliminates the benefit of owning physical gold.

4. High Short-Term Volatility

Gold is often seen as a store of value that will work as a hedge against a market crash. Over the long term, this can be true because gold isn’t particularly volatile over long periods. However, in the short-term, gold can experience significant price volatility.

For example, between Nov. 1, 2021, and Dec. 31, 2021, the price of an ounce of gold rose from about $1,780 to $1,865, dropped back below $1,780, and rose again to $1,825. Investors who want a stable investment option that will stop the value of their investment portfolio from fluctuating in the short term might not appreciate gold’s frequent price movements.

5. Speculative

Gold is a speculative asset. Gold’s primary value comes from its limited supply and the fact that many people view it as precious. It often increases in price when investors are fearful, when stocks lose value, or when inflation begins to rise. It doesn’t generate value on its own.

Investors buy gold because they believe that they can sell it to someone else for more money down the road. This is in contrast to other forms of investing. An investor might buy a bond, for example, because it generates value in the form of interest payments. 

When you buy gold as an investment, you’re speculating on its future price movements rather than its intrinsic value or any income it might produce.

6. No Yield

Gold doesn’t offer any yield while you own it. The only way to generate a return from gold is to sell it to another person.

This makes gold a speculative investment, but also means it isn’t suitable for every investment situation. 

For example, if you want to invest your money to produce a cash flow you can live on, gold won’t be able to provide that income. You’ll be better off investing in the stock market or bonds because they produce cash in the form of dividends and interest payments. This provides a cash flow that they can live on without having to sell their investments.

Gold investors who want to turn their portfolios into a source of income will have to start selling their gold.

7. Taxes

All investing involves dealing with taxes. However, investing in gold can create significant tax headaches, especially when it’s physical gold.

As a gold investor, the most important tax to be aware of is capital gains tax. When you sell an investment for a profit, you pay this tax on that gain. So, if you buy something for $100 and sell it for $150, you pay taxes on your $50 profit.

With investments like stocks and bonds, your brokerage keeps track of the amount you paid for an investment — called the cost basis— and how much you sell it for. This makes dealing with taxes a bit easier.

If you’re buying physical gold, it’s up to you to keep track of how much you’re paying for it. If you’re making frequent purchases of small amounts, such as individual coins, you can wind up with massive spreadsheets trying to keep track of the cost of each coin you buy. This makes it difficult to calculate taxable gains and losses.

Gold Stocks vs. Physical Gold

Before investing in gold, consider whether you want to buy gold stocks or physical gold. Both strategies have pros and cons.

Physical gold gives you the most control over your investment. You can hold the metal, choose where and how to store it, and trade it in person. However, storage and transportation can be complicated and tracking the cost basis for taxes is hard. Additionally, the physical metal doesn’t produce value in the form of dividends or other interest payments.

Alternatively, you can buy shares in ETFs that track the price of gold. This lets you get exposure to the asset without some of the headaches that holding physical metal produces. But this turns a tangible asset into one that’s less tangible. And gold funds charge management fees that can reduce your profit

You can also buy shares in businesses exposed to gold, such as mining companies or gold storage businesses. These companies’ shares may gain or lose value as gold does. However, investing in them exposes you to other potential risks due to factors beyond the price of gold, such as the quality of company leadership.

Final Word

Gold is one of the oldest investments on the planet, serving as a global store of value for millennia. This makes it an attractive option for investors who want to be able to physically see and hold their investments.

In the end, whether you should invest in gold is a personal decision. Adding gold to your portfolio increases diversification and may give you a hedge against inflation or market instability. However, investing in a physical asset can add complexity to your portfolio by making you deal with transportation and storage. 

Before buying gold, consider other investments that may diversify or hedge your portfolio, such as cryptocurrency and real estate. You may find that gold has a place in your portfolio alongside these other asset classes.

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