I remember the first time my grandfather showed me his small collection of gold coins that he kept in an old cigar box. He said with a knowing smile, “These little beauties have kept their value through wars, recessions, and everything else life threw at us.” That conversation made me want to invest in gold, and over the years, I’ve learned that his advice wasn’t just sentimental; it was beneficial financial advice.

For thousands of years, investors have been interested in gold, and for a sound reason. In today’s uncertain economy, knowing how to invest in gold is a useful skill for anyone who wants to protect their wealth from inflation, add stability to their portfolio, or just follow in the footsteps of many successful investors.

Getting to Know Gold: An Investment

Past Performance and How the Market Works

Let’s look at the numbers first, because they tell a lot. Gold has returned an average of about 7.8% per year over the past 50 years. That’s not too bad, considering that most people see it as a defensive asset instead of a growth investment.

Gold is especially intriguing because of how it does when the economy is in trouble. In 2008, when the stock market was crashing, gold prices went up by about 25%. During the late 1970s and early 1980s, when inflation was high, gold prices went up from about $200 to more than $800 per ounce.

Many individuals are unaware that the rise in gold prices does not always follow a linear trajectory. From 1980 to 2001, the precious metal went through a terrible bear market, losing about 60% of its value when adjusted for inflation. This experience shows us that gold, like any other investment, goes through ups and downs and needs time.

Gold usually moves in a different direction than stocks and bonds, which is what you want in a tool for diversifying your portfolio. When I look at correlation data, I see that gold often has a very low or even negative correlation with stock markets, especially when the markets go down. This makes it valuable not because it always makes money, but because it often makes money when other things are losing money.

Things that affect the price of gold

Knowing what makes gold prices go up and down has helped me make better investment choices over the years. When people are worried about the economy, they often buy gold. Gold is like a fear gauge for the market.

Inflation is good for gold. Gold tends to keep its value when paper money loses its buying power. I’ve seen this phenomenon happen a lot: when inflation is high, gold prices tend to go up. It’s simple to understand: if a dollar buys less stuff than it used to, you need more dollars to buy the same amount of gold.

Interest rates do the opposite. When interest rates are high, bonds and savings accounts pay favorable interest, which makes gold and other assets that don’t pay interest less appealing. But when interest rates are low, as they have been recently, gold is more appealing because it doesn’t cost much to own.

Some of the most significant changes in gold prices happen because of geopolitical events. Wars, political unrest, trade disputes, and currency crises all tend to make people want to buy gold. I remember when gold prices went up during the uncertainty surrounding Brexit and again during different wars in the Middle East.

Gold’s Place in a Well-Diversified Portfolio

Most financial advisors say you should put 5% to 10% of your portfolio into gold. Some say that if you’re conservative or worried about inflation, you should invest 20% in gold. Finding a percentage that helps you sleep better at night without limiting your growth is the most important thing.

Gold’s superpower isn’t making money; it’s keeping it. Gold is more likely to keep your buying power over decades than stocks, which could double your money in a few years. If your great-grandfather bought an ounce of gold in 1920, it would buy about the same amount of stuff today, even though the economy has changed a lot since then.

Stressed markets highlight the value of gold in a portfolio. When I think back on big market crashes, I see that gold often helped investors keep their money safe while others lost a lot of money. It’s like having an insurance policy that sometimes pays you instead of costing you money.

Ways to Put Money into Gold

Owning Gold in person.

Holding real gold in your hands is satisfying because it makes the investment feel real and permanent. There are different types of physical gold, and each has its pros and cons.

Individual investors probably like gold coins the most. People know about and can trade American Gold Eagles, Canadian Gold Maples, and South African Krugerrands. I like coins better because it’s easier to tell if they’re real, and their smaller denominations make them more useful for partial sales.

Gold bars have the lowest premiums over spot price, especially when they are bigger. But it can be harder to prove their authenticity and sell them in small amounts. Coins are easier for beginners, but bars are better for big investments.

The biggest problem with physical gold is where to keep it. Keeping it at home makes you more vulnerable and could void your homeowner’s insurance. Safe deposit boxes work, but banks aren’t open all the time if you need to get to them. Professional storage facilities charge 0.5% to 1.5% of the value of your gold each year, but they offer the best security.

It can be harder to sell physical gold than to buy it. Different coin dealers, pawn shops, and online platforms have different prices and experiences. Before you need to sell, I’ve found that getting to know trustworthy dealers makes the process a lot easier.

Funds and Securities Related to Gold

For many investors, gold securities are the best way to get exposure to gold without having to worry about storing it. Gold ETFs, such as GLD and IAU, closely follow the price of gold and trade like stocks. You can get them through any brokerage account, and they usually charge 0.25% to 0.40% a year.

I love that gold ETFs are easy to sell. You can do it during market hours and have cash in your account in a few days. If you have enough shares, some ETFs will even let you trade them for real gold. However, most investors never use this option.

Investing in mining stocks is a different way to invest in gold. Companies like Newmont, Barrick Gold, and Agnico Eagle can make gold prices go up even more. For example, when gold prices go up 10%, mining stocks might go up 20% or more. But they also come with company-specific risks, such as problems with operations, management, and politics in mining areas.

Gold mutual funds and sector ETFs give you exposure to several mining companies, which lowers the risk of investing in just one company but still gives you leveraged exposure to gold prices. A lot of people like the VanEck Gold Miners ETF (GDX) because it has shares in dozens of gold mining companies around the world.

Futures and options Let experienced investors control a lot of gold with small initial investments, but they need a lot of knowledge and come with big risks. If you don’t know much about derivatives, I suggest you stick with simpler methods.

Ways to Invest in Gold Online and in Other Ways

In the digital age, there are some cool new ways to buy gold. There are now several platforms that offer digital currencies or tokens backed by gold. These represent ownership of real gold kept in safe vaults. These are new and haven’t been tested in major market stress yet, even though they are new.

Some dealers in precious metals offer gold savings accounts, which let you buy small amounts of gold and build up your holdings over time. You don’t actually own the gold, but the provider stores it for you. This method can be helpful for strategies that use dollar-cost averaging.

People who couldn’t afford full ounces of gold can now invest in gold thanks to fractional gold ownership apps. Smartphone apps let you buy $10 worth of gold, which makes it easy to start small and build up your holdings over time. These platforms are simple to use, but they usually charge more than traditional methods.

Thinking about costs and practical issues

Costs of Investing in Gold

It’s critical to know what things cost because they affect your returns. Depending on the product and dealer, physical gold usually costs 3% to 8% more than the spot price. Smaller denominations usually have higher premiums. For example, a one-ounce coin might have a 4% premium, while a ten-ounce bar might only have a 2% premium.

Over time, storage costs add up. Home storage can cause problems with insurance and safety. The cost of a safe deposit box is between $50 and $300 a year. Storage facilities for professionals charge between 0.5% and 1.5% of the value of your gold each year. These ongoing costs can have a big effect on long-term returns.

Most dealers will pay you 2% to 5% less than the spot price when you sell physical gold. Because of this bid-ask spread and the purchase premiums, gold needs to go up a lot just for you to break even. Gold ETFs don’t have to pay most of these costs, but they do charge annual management fees.

Tax Consequences and Reporting Obligations

Many new gold investors don’t know this: the IRS sees physical gold as a collectible, which means that long-term capital gains are taxed at a maximum rate of 28%, which is higher than the rates for stocks and bonds. This can have a big effect on your returns after taxes.

Gold ETFs are taxed differently. They are taxed as collectibles, but in a complicated way that usually leads to lower effective tax rates. Just like regular stocks, gold mining stocks are taxed. They get lower long-term capital gains rates.

When you buy physical gold, it’s important to keep track of your cost basis for each purchase. Keep all of your receipts, and think about taking pictures of your gold with the purchase paperwork. Dealers have to report some gold sales to the IRS, but you are in charge of making sure your tax return is correct.

Some investors keep gold in tax-advantaged accounts like IRAs, but they have to use approved custodians and storage facilities to do this. This doesn’t have any immediate tax effects, but you’ll have to pay regular income tax rates on distributions, which could be higher than capital gains rates.

Strategies for timing and entering the market

Even professionals have a challenging time timing the market with gold. I think that dollar-cost averaging—putting the same amount of money into an investment every time, no matter what the price—is better for most people than trying to find the best time to buy.

But some economic indicators can help you decide when to do things in general. Gold prices tend to go up when inflation expectations go up, real interest rates go down, government debt goes up, and geopolitical tensions rise. When these things happen at the same time, gold often does well in the months or years that follow.

People who are interested in charts and patterns can learn more from technical analysis. Gold often follows long-term trends that last for several years. If you can spot these trends early, you can make better investments. But don’t just look at technical indicators; long-term gold performance is usually driven by fundamental economic factors.

Possible Drawbacks and Risks

Risks in the market and prices

New investors might be surprised by how much the price of gold changes. Gold is thought to be a stable store of value over long periods of time, but it can be very volatile over shorter periods of time. Prices go up and down by 2% to 3% every day, and yearly volatility is often higher than that of broad stock market indices.

People who worry about price manipulation aren’t just making up stories; regulators have fined big banks for manipulating the markets for precious metals. These kinds of things don’t usually have a big effect on long-term investors, but they can cause short-term price changes that make it difficult to time your trades.

For international investors, changes in currency add another layer of difficulty. Gold is usually priced in US dollars, so investors who use other currencies are at more risk of losing money because of changes in the exchange rate.

Problems with storage and security

There are problems with storing physical gold that don’t come up with paper investments. It’s clear that storing gold at home is not safe; if someone knows you have it, they will want to steal it. Even if you have good security, thieves who are determined may still be able to get to your things.

It can be hard and expensive to get insurance for gold. Most standard homeowner’s insurance policies don’t cover precious metals very well. Adding separate riders or specialized policies to your gold can cost you 1% to 2% of its value each year, which adds to the cost of your investment.

When you use a third-party storage service, you take on counterparty risk. What if your storage provider goes out of business or is found to be a scam? Even though good companies have insurance and are checked on regularly, you are still relying on other people to protect your money.

Problems with liquidity and access

Gold is usually thought of as liquid, but it can be difficult to sell physical gold quickly at fair prices, especially in smaller markets or on weekends and holidays. You can’t just click a few times and turn gold into cash like you can with stocks or ETFs.

Geographic limits also impact gold liquidity. In rural areas, there may not be many places to buy and sell gold, which could mean having to accept lower prices or send your gold to dealers who are far away. These conditions can be especially bad when the market is stressed and you really want to get to your investment.

It can be difficult to sell a lot of gold quickly. It might be easy to sell a few coins to a local dealer, but if you have many coins, you might need to find specialized buyers or accept big discounts to sell them right away.

Five Easy Ways for Anyone to Start Investing in Gold

Setting Goals for Investments and Allocations

Before you buy your first piece of gold, think about what you want to do with it. Are you protecting yourself against inflation? Are you preparing for an uncertain economy? Are you spreading out your investments? Your investment strategy should be based on your goals.

I suggest that most investors start with 5%–10% of their investable assets in gold. This adds real benefits to your portfolio’s diversification without hurting its growth potential too much. Conservative investors who are worried about inflation might want to put more money into stocks, while younger investors who are more interested in growth might want to put less money into stocks.

Think carefully about how long you want to hold on to your money. Gold is best as a long-term investment, like five to ten years or more. Gold’s price changes and transaction costs could work against you if you need money in a few years. Put your gold in a place where you won’t need it for a long time.

Choosing the Best Way to Invest

The way you invest in gold should depend on your situation. Coins or small bars might be a beneficial choice if you want the peace of mind that comes with owning something and don’t mind having to store it. Gold ETFs are easier to use if you care more about convenience and liquidity.

Think about how much money you want to invest. ETFs or fractional ownership programs are better for small investments (less than $5,000) because the costs of storing and buying physical gold are so high. It’s easier to justify the fixed costs of owning something physically when you have a lot of money to invest.

Choose an investment vehicle that fits your goals. If you’re worried about the economy falling apart, physical gold makes sense. ETFs are fine if you want to diversify your portfolio. Mining stocks might be a better choice if you want to invest in gold prices with leverage.

Take action and maintain your investments.

You don’t have to be perfect to start investing in gold; you just have to take action. Start with a small position using whatever method feels best to you, and then slowly add to your holdings over time. This method lets you learn by doing without putting a lot of money at risk while you’re still learning.

Make a plan to check your gold allocation on a regular basis. Your gold percentage will move away from your goal as other investments go up or down. Rebalancing once a year or when your allocations change a lot from your targets helps you keep the level of risk you want.

Make plans for how to get out of a situation before you need them. Know how you’ll sell your gold, what costs you’ll have to pay, and what market conditions might make you want to sell. Having a plan helps you make decisions based on facts instead of feelings when the market is stressful.

Conclusion

Investors looking to diversify their portfolios and protect themselves from inflation can do so in many ways with gold. To be successful, you need to know about the different ways to invest, like owning property, buying stocks, and using digital options. You also need to carefully consider the costs, risks, and practical issues involved.

The most important thing is to make sure that your gold investment strategy fits with your overall financial goals, how much risk you’re willing to take, and how long you plan to invest. Gold can be a useful part of a well-balanced portfolio, whether you like the feel of real coins, the ease of ETFs, or the potential for growth in mining stocks.

Keep in mind that gold isn’t a way to get rich quickly; it’s a way to protect your wealth and sometimes pay you to own it. Start small, learn as you go, and slowly build up a position that helps you sleep better at night while you work toward your long-term financial goals. Regular checks and strategic changes make sure that your gold holdings continue to do what you want them to do in your overall investment portfolio.