Why Do People Really Buy Gold And What Are The Alternatives?

Warren Buffet once said, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”^[1] However, as the global pandemic impacts have wreaked havoc on financial markets, investors have started looking elsewhere to find safety. One of those areas is gold, which has traded at over $1,800 per ounce this year, the highest since 2011.^[2] Maybe you or a Martian you know have considered investing in gold as well. So why do people buy gold? Even Warren Buffet, the man who famously stated the quote above, has invested in gold this year. Read on to learn why people buy gold and what other alternatives exist.

Why People Buy Gold

Investors flock to gold in times of turmoil because it is seen as a safe haven from the equity markets. Gold also has typically had a negative performance correlation with stocks; as a result, investors see it as a way to provide diversification protection to their portfolio. Gold has traditionally maintained its value over time and is a stable long-term investment. Investors also use gold to help protect their portfolios from the effects of inflation. If you invest in currencies, the value of gold typically increases during times of inflation. Overall, it is a physical asset that provides shelter for your portfolio in times of turmoil.

Should You Buy Gold?

Investors shouldn’t buy gold simply based on the fact that it is currently trading high. It’s often better to be more contrarian when it comes to your investing. In other words, when an asset is selling off and the perceived value is lower, that is the time you want to get your foot in the door and buy. In terms of performance, gold investors and equities investors have been at odds for decades, debating which asset performs better.

The reality is that both have gone through good periods and bad periods of performance, just like almost any other investment. It’s still best to have a diversified portfolio made up of several different types of assets, and it may be beneficial to allocate a portion to gold, due to gold’s negative correlation to equities.  A qualified financial professional can help. Talk to your financial professional about establishing a portfolio uniquely tailored to your particular needs, which may or may not include gold.

The Alternatives

If you want to avoid buying and physically owning gold, you have some alternatives. Many investors get gold exposure in their portfolios by buying shares of gold-producing companies, just as Warren Buffet did back in August by purchasing $565 million of Barrick Gold shares.^[3]

Or you can invest in mutual funds and ETFs that hold gold as an underlying asset or invest in the gold-producing industry by buying shares in mining stocks. There are other types of precious metals you can invest in as well. Silver, platinum, and palladium are used for various manufacturing purposes and can diversify a portfolio.

Gold has served our portfolios well this year.  We continue to hold gold mining stocks in our tactical models for 2 reasons: a weakening dollar and expected inflation in a post-COVID world.

Depending on your specific investment strategy, investing in a few different types of precious metals may help round out that portion of your portfolio. The bottom line? Seek advice from your financial professional if you consider incorporating gold or other precious metals into your portfolio. They’ll be able to analyze your specific investment situation to determine the best way to do that.

We’re Here For You

Are you considering adding some gold exposure to your portfolio? We can help. At Prosperion Financial Advisors, our care for you goes beyond the advice we give. To schedule an introductory meeting with Nelisha, call 303-793-3202, book online here, or email  nelisha.firestone@lpl.com.

About Nelisha

Nelisha Firestone is an LPL Financial Advisor with Prosperion Financial Advisors, an independent fee-only financial planning firm based in Denver, CO. With over 16 years of experience, Nelisha is passionate about guiding women to live their best lives by crafting their road map to financial security and freedom. Her drive to help women comes from watching her grandmother, who was widowed at the age of 49, struggle financially after her husband died. Nelisha recognizes that if her grandmother had someone in her life to offer her sound financial advice, she would have lived a much better life. That’s why Nelisha specializes in serving female business owners and single women with comprehensive financial planning and wealth management services. She recognizes that women have unique challenges, and she partners with her clients by educating and empowering them to make the best financial decisions possible. Nelisha has a bachelor’s degree from Kansas State University and is married to a Colorado native. Nelisha and her husband have two beautiful daughters, Addison and Eden, and love to spend time in the great outdoors hiking, skiing, and camping—to name a few! To learn more about Nelisha, connect with her on LinkedIn.

^[1]https://www.forbes.com/sites/oliviergarret/2017/04/27/warren-buffett-hates-gold-but-heres-five-reasons-you-need-to-own-it/?sh=23fb4ec16cbb

^[2] https://www.cnbc.com/2020/07/20/investing-how-to-invest-in-gold-is-now-a-good-time-to-buy-gold.html

^[3]https://www.advisorperspectives.com/commentaries/2020/08/21/and-just-like-that-buffett-likes-gold