Due to the war in Ukraine, a lot of people have been asking me whether to buy gold now. Therefore, I thought I’d revisit this post that I write a while ago and have updated today.
Before you buy gold, make sure you understand the basics of commodities. A commodity is typically a resource that the market treats as equivalent or pretty close to it regardless of who produced it. In other words, commodities are highly fungible.
Gold is one of the most popular commodities that investors track and trade. Other commodities include crude oil, natural gas, soybeans, coffee, corn, wheat, sugar, rice, and iron ore.
The price of gold and other commodities is usually determined by actively traded spot and derivative markets. How widely available a commodity is also impacts its price and profit margin. You can easily follow the SPDR Gold Trust (GLD) if you want to buy gold or just monitor how it’s trading.
The interest in buying gold has increased due to inflation and Russia’s invasion of Ukraine. As a result, gold prices have begun to soar. Below is the latest chart of gold, silver, and platinum prices since 1970, inflation adjusted. Gold is now trading about $2,000/oz.
Before You Buy Gold, Understand Where It Comes From
Although you may be hyped up to buy gold now that it’s surged higher, please take a step back for a moment.
Imagine a tennis court.
Now, imagine a cube with sides that are slightly shorter than the length of a tennis court. No, this isn’t some sort of New Age meditation. This is, in fact, a way to visualize all the gold that has ever been mined since the beginning of time.
Most people are shocked to discover the relatively small amount of gold that exists above ground. Indeed, if all that gold was evenly divided between each person on Earth, each individual would only be entitled to a mere 23 grams.
Now let’s examine some of the best reasons to buy gold, such a rare chemical element that has captivated humans for thousands of years.
The State Of The Economy Impacts The Desire To Buy Gold
It’s important to know the state of the economy before you buy gold. Is the country at the brink of a recession that could bring the world to its knees? Or is the economy in a raging bull market with no end in sight?
Everything is interconnected.
During good times when the global economy is healthy with low levels of inflation and low unemployment rates, gold prices tend to stay flat. On the other hand, rocky times and recessions tend to make gold prices rise as demand increases.
People have a tendency to run to buy gold when the stock market is crashing as a hedge against uncertainty in the economy. Gold is known for being relatively dependable in the darkest of times.
Investors also buy gold as a hedge against inflation. Gold prices tend to rise when the dollar is declining and inflation is going up. In addition, you can’t dilute gold, so it’s good at retaining value.
Personally, I think the best hedge against inflation is real estate. Real estate rides the inflation wave due to rising rents and rising real estate prices. Further, real estate provides utility, unlike gold. As a result, I’m a heavy buyer of real estate in this inflationary environment.
Gold prices affect the countries that import and export it. In addition, gold is commonly used to measure the value of a currency. Thus, the value and strength of gold impacts global trade and foreign exchanges.
Reduce Volatility & Protect From Inflation
You can help dampen your portfolio’s volatility with with gold due to its ability to withstand inflation and times of uncertainty. Indeed, in the years since World War II (when inflation has affected the U.S. most severely), the price of gold has risen.
Thus, the decision to buy gold can be viewed as a shield to protect oneself against the ever-weakening dollar, as well as unforeseen economic crises. Unfortunately, there is a chance that World War III could break out due to the Russian invasion.
How To Buy Gold
There are a plethora of avenues available for those looking to buy gold, so tailor your purchase to suit your specific needs and comfort level. Purchasing physical gold is of course a time-honored option.
Others prefer to invest in gold ETFs such as GLD, gold mining companies, or gold mutual funds to avoid the logistics of storing, moving, insuring, etc. There are possibilities for all budgets and levels of financial expertise. Just watch the fees when buying a gold mutual fund.
Personally, I find that simply buying GLD and rare gold watches are the easiest methods to buy gold. In my past life, I used to buy and sell rare watches for fun. The prices of rare watches keep going up. Even basic steel Rolexes have seem strong price inflation.
There are even Gold IRAs for those who are crazy bullish about gold. Gold IRA companies can help you convert your paper assets into gold bullion and coins using a process known as a gold IRA rollover. But I wouldn’t bother.
Slow Production + High Demand = Higher Gold Price
Gold production growth can’t keep up with demand. Gold production increased at the rate of 1.9 percent for the first 90 years of the 20th century. But, in the past 20 some years, it has grown at a mere 0.7 percent per year.
Meanwhile, demand to buy gold continues to grow worldwide, especially in China and India. There is an insatiable demand for gold by Indians especially. Further, the Vietnamese love gold as well. But it is really the demand out of China and India that is driving excess gold demand.
With gold’s history of counter-cyclicality coupled with strength during uncertain times, the desire to buy gold has increase. At the time of this post update, the price of gold has come down from its peak. So perhaps you could start owning a tiny piece of that golden, tennis court-sized cube.
Performance Of Gold ETF GLD vs. VTI, Vanguard Total Stock Market Index Fund ETF
Below is a 5-year comparison chart between the gold ETF GLD vs VTI, the Vanguard Total Stock Market ETF. VTI had been outperforming since late 2020. But GLD is starting to outperform again in 2022 due to all the uncertainty.
Overall, having some gold in your portfolio isn’t a bad idea as a capital preservation investment. Look at how GLD held up during the March 2020 stock market crash.
More Recommendations To Build Wealth
1) Invest In Real Estate During Times Of Uncertainty
Stocks are volatile while gold generates no income. Therefore, if you want to dampen volatility, diversify your investments, boost passive income, and build wealth at the same time, real estate is an attractive investment.
My favorite real estate investing platform is Fundrise. With over $2.5 billion in assets under management and over 210,000 investors, Fundrise is the leading, vertically integrated real estate platform today. Investors can invest in their diversified real estate funds with as little as $10.
Fundrise primarily focuses on single-family, multi-family, and build-to-rent properties in the Sunbelt. With lower valuations, higher yields, and strong demographic shifts, Fundrise investments are in the sweet spot of a positive long-term trend.
The combination of rising rents and rising capital values is a very powerful wealth-builder. I’ve personally invested $810,000 in private real estate across the country to take advantage of lower valuations and higher rental yields.
2) Manage Your Finances In One Place
One of the best ways to become financially independent is to get a handle on your finances by signing up with Personal Capital.
They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances.
Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also have the best Retirement Planning Calculator around.
There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
The Top Reasons To Buy Gold is a Financial Samurai original post. I’ve been writing about personal finance since 2009 and used to work in finance for 13 years. If you want to read more about investing and building wealth, you can sign up for my free weekly newsletter.