Additionally, reviewing the pricing trends, you can see that gold prices spiked during the global pandemic as investors favored commodities over stocks. This is a typical trend during economic downturns and times of uncertainty.
Let's take a closer look at the returns and risks of investing in gold and considerations for including it in your wealth building plan. . .
Gold prices spike in the following circumstances:
- Perceptions of a crisis reduce expected growth in the economy, triggering a desire for stable assets such as gold, cash and government bonds. (Which is exactly where we are right now.)
- When inflation rises, reducing spending power.
- When the cost of labor and materials trigger inflation, gold doesn't sharply increase in value. However, during a recession, when the value of currency remains low, people tend to favor gold investments.
But what about the stock market?
An investment in gold might seem promising until you compare it to the S&P 500. The index which tracks 500 of America’s biggest companies provided a 196.9% return over the last 10 years. That means if you had invested $1,000 in the S&P 500 10 years ago, you’d now have $3,362. That’s substantially more than gold.
However, some investors consider gold to be more of a “safe haven” than the stock market. With no transfer of risk, there is no risk premium with gold, which is expected to retain its real value over time. That comes at a price. Investments considered lower risk like bonds and gold typically return less than riskier securities.
Risks Due to Volatility
Gold's long-term, intrinsic value makes it a favorite investment vehicle in a fluctuating economy. Investors turn to gold as a place to store value rather than make a profit. That's why gold prices are widely regarded as an indicator of investor confidence. Eventually, people may lose confidence in U.S. government bonds, pushing gold prices even higher. The intricate relationship between gold, supply and demand, and inflation tends to have a noisy correlation. It's not easy to pinpoint when to buy gold but even starting small can have an extremely positive effect over time -- adding stability and growth to your savings. Always talk to a trusted financial advisor before making any investment decisions. Want to know even more? Have questions? Email us! [email protected].