Investing in Gold: 10 Facts You Need to Know

With gold prices climbing back toward all-time highs, you might be tempted to add some to your portfolio. Many investors already have. Sales of gold-backed exchange-traded funds have set records this year, with net inflows of $23 billion in the first quarter. And gold has delivered solidly positive returns during this bear market in stocks. But pouring a chunk of your assets into gold isn't always a good idea. In fact, gold has a spotty long-term record as an investment.

Gold? Nope. Maybe U.S. bonds? Wrong again. Large-cap stocks traded in the U.S. have easily outperformed those asset classes over the past four decades. Let's go to the tape: Through April 9, with dividends reinvested, the S&P 500 has returned an annualized 11.2% since January 1980. As for bonds, the benchmark 10-year Treasury note has gained an annualized 6.6%. But gold hasn't been quite so lustrous by comparison. Since January 1980, the yellow metal has delivered an annualized gain of just 2.8%. Even more recently, gold still has underwhelmed. The S&P 500 has put up annualized returns of 10.9% with dividends reinvested over the past decade, while bonds have returned 3.9% and gold 3.6%.

Once again, U.S. stocks beat both U.S. bonds and gold. The S&P 500 has gained 9.4% on an annualized basis with dividends reinvested since January 1990. The 10-year Treasury note has delivered an annualized return of 5.1%. And gold brings up the rear with an annualized gain of 4.9%. Interestingly, gold is supposed to be bulwark against rising prices, but when adjusted for inflation, the commodity performed even worse. Adjusted for inflation, the S&P 500 has returned an annualized 6.9% since January 1990, including dividends. The 10-year Treasury has generated an annualized return of 2.7%. Gold adjusted for inflation has delivered only 2.5% annualized. Note that the price of gold actually dropped about 12% between 1979 and 1989. Gold often loses value in prosperous times, as the 1980s generally were.

The past 20 years have been gold's time to shine. Since January 2000, gold is up 9.3% on an annualized basis. Adjusted for inflation, it has gained 7% annualized. Let's not forget that gold dropped to $208 an ounce in 1999 from $595 in 1980 and $401 in 1989. Once again, gold's price fell during a period of economic prosperity: the 1990s. Stocks are in second, with a return of 5.3% annualized, including dividends. (Or 3.1% after factoring in inflation.) Equities were the victim of the bursting of two bubbles - the tech bubble early in the century and the real estate and credit bubbles starting around 2007. Bonds came in last during this period, with a 4.2% annualized return, or 2.1% in inflation-adjusted terms.

The price of gold doesn't track inflation, as a general rule. Between 1987 and 2001, as inflation fluctuated around 3% a year, the price of gold dropped. But it is true that during periods of extraordinarily high inflation, gold's price may soar. That's what happened from the mid 1970s through the early '80s, when inflation crept from 4.8% in 1976 to 13.3% in 1979 and 12.4% in 1980, before beginning a long descent. The price of gold leapt from less than $150 an ounce to more than $800, then collapsed to $400 by 1981. Want a guaranteed inflation hedge? Try Treasury Inflation-Protected Securities (TIPS).

Gold can soar in value during hard times, when investors are fearful and uncertain and seek safety. Just look at the rise in prices amid the spread of COVID-19. Gold has appreciated by roughly 9% from the start of 2020 through April 22, while stocks have delivered a 12.4% loss with dividends included. The 21st century has given gold several opportunities to shine. The turmoil that followed the Sept. 11, 2001, terrorist attacks and continuing through the 2008-09 economic meltdown was bullish for gold investors. Concerns about the health of many European economies and soaring budget deficits and political uncertainty in the U.S. pushed gold's price to an all-time closing high of $1,895 in September 2011. It's not unusual to see gold's price rise with bad news (such as the global pandemic or a sovereign debt crisis) and drop with good news (such as better-than-expected economic growth).

A longtime argument in favor of investing in gold is that it is a good store of value - that is, its inflation-adjusted price remains relatively stable over long periods. A store of value implies a steady price, and as we have seen, gold prices are anything but steady. Although gold's correlation to stocks is complicated, suffice to say the precious metal can be volatile. In 2012, for example, the price rose almost 6%. In 2013, it tumbled 28%.

Gold is the most popular precious metal for investors, but it's not the most expensive. That title actually belongs to rhodium, which hit an 11-year high of $9,850 per ounce in January before coming back to about $7,400 currently. Indeed, of the major precious metals, gold comes in third by price per ounce, behind rhodium and palladium, but ahead of platinum and silver.

As attractive as coins and bullion may be, funds are the easiest way for retail investors to get exposure to gold. They're becoming increasingly popular too. In 2019, demand for gold from gold-backed ETFs rose more than 400%, vs. a decline of 20% for bars and coins. No wonder: It's much easier to get gold exposure by holding a gold fund electronically in a brokerage account rather than receiving, storing and insuring the physical metal. The SPDR Gold Shares (GLD), the world's largest gold-backed exchange-traded fund, has about $57.3 billion in assets. The ETF tracks the price of gold bullion. If you choose to invest this way, Kiplinger prefers the lower-cost iShares Gold Trust (IAU), which has annual expenses of 0.25%, compared with 0.40% for GLD. You also can invest in numerous mutual funds and ETFs that invest in the stocks of gold-mining companies.

Gold prices can be volatile, but they're nothing compared to silver. The market for silver is smaller than for gold. Plus, silver has more industrial uses than gold, making the former's price more sensitive to the ups and downs of the economy. These two factors combine to make silver's price jumpier than gold's. If you want a good night's sleep, go with gold investing, not silver.

The largest legal tender gold coin ever produced was struck by the Perth Mint in Western Australia in 2012. The 2012 "Australian Kangaroo One Tonne Gold Coin" contains one metric tonne of 99.99% pure gold, and is approximately 80 centimeters in diameter by 12 centimeters thick. The massive coin has a face value of $1 million Australian dollars but is estimated to be worth more than $50 million AUD.