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9 Reasons Why Gold Is a Good Investment in 2019

John Csiszar

 

 

August 2019 has been a volatile month for the stock markets. The Dow Jones Industrial Average, S&P 500 and Nasdaq composite each sank around 3% in a single session early in the month on concerns about a bevy of worries, from slowing global growth to the inversion of the yield curve. Meanwhile, gold prices have been humming along, having an excellent 2019 year-to-date. But will the good times keep rolling for the shiny metal? Here’s a look at reasons gold might make a good investment for the rest of 2019, along with information about what drives the price of gold and the various ways you can buy it.

1. It's Viewed as a Safety Trade

Gold has always been viewed as a safety trade, primarily because it is a hard asset. Currencies like the U.S. dollar are known as “fiat” currencies because they aren’t backed by anything except the promise of the government. Ever since President Richard Nixon took the U.S. off the gold standard back in 1971, the dollar has not been backed by any hard assets. “Gold bugs” bullish on the metal argue that gold is now inherently more valuable than any government-backed currency, making it an asset of choice when investors seek safety. In the uncertain times of 2019, many investors are adding gold to their portfolios, driving the price up.

2. It Can Be a Hedge Against Inflation

Gold is a popular hedge against inflation because it retains its value. In an inflationary environment, financial assets like stocks and currencies become less valuable because the purchasing power of those assets declines. As an example, imagine that your weekly grocery bill is $100. If annual inflation is running at 5%, that same bundle of groceries will cost $105 next year. This deflates the value of your money. As a hard asset, gold tends to hold up in an inflationary environment. In 2019, some experts are worried that inflation will start rising in the U.S., raising the popularity of gold.

3. There's Momentum

In the investment world, market sectors that have been rising tend to continue rising. This is known as momentum. As of Aug. 16, 2019, the price of gold had risen about 18% year-to-date. Momentum traders might continue buying the metal, driving the price up even higher as buying begets more buying.

4. There's Stock Market Uncertainty

In the first two weeks of August, the S&P 500 index swooned nearly 7%. Investors fretted over various market and geopolitical concerns, from the trade war with China and slackening economic indicators to the outcome of the 2020 presidential election. In times of uncertainty, hard assets such as gold provide defensive plays for investors. As all three of these factors seem likely to continue, gold could maintain its upward trajectory over the near term.

5. There Could Be a Looming Recession

In mid-August 2019, markets were riled by the arrival of a common recession indicator: the inversion of the yield curve. The yield curve is a plot of the interest rates paid by bonds of various maturities. Typically, longer-term bonds yield more than shorter-term bonds because they are considered riskier. But when a recession is looming, longer-term bonds “invert” and pay less than short-term bonds. Although no recession predictor is perfect, market participants take this one seriously, resulting in stock-market volatility. Meanwhile, gold rallied over the same time period. If additional recession indicators appear on the horizon, gold may continue its upward surge.

6. It's Scarce

One of the reasons gold is always valuable is because it is scarce. According to the World Gold Council, if you assembled all the gold mined in the history of the world it would only fill a cube measuring 21 meters on each side. It is rarer to find a one-ounce gold nugget than it is to unearth a five-carat diamond. Scarcity plus demand means there will always be a market for gold.

7. Interest Rates Are Falling

One of the arguments against gold as an investment is that it doesn’t pay any interest or dividends. In periods of high or rising interest rates, gold can lose some of its luster because stocks, bonds and even savings accounts are paying out cash to investors. However, when rates are low or falling — as they are in 2019 — gold becomes a more attractive investment because the alternatives are not paying much income.

8. It Offers Diversification

No matter the market environment, or how you choose to gain exposure to gold, the metal works as a diversifying investment in all scenarios. Gold zigs when other investments zag, which can help smooth out the long-term performance of your portfolio. Both the gold and stock markets — and even the bond market, for that matter — can be volatile investments. So owning assets that are noncorrelated, meaning they move in different directions at the same time, can actually help dampen the volatility of your portfolio as a whole.

9. If the Dollar Falls

A falling dollar benefits the price of gold in two ways. First, most of the gold used in the U.S. is imported. When the dollar is weaker, the cost of imports becomes more expensive, thus fueling a rise in the price of gold. Second, a falling dollar is often seen as a sign of economic or political weakness, which can help trigger global uncertainty. This type of uncertainty is what drives investors to the safe-haven asset of gold. In 2019, President Donald Trump has repeatedly called for the Fed to lower interest rates, which often results in a falling dollar. Under this scenario, gold prices may rally.

Way To Invest No. 1: Collectible Gold Coins

Collectibles are items such as rare art, antique cars and gold coins that investors buy out of a combination of aesthetic appreciation and the potential for future price appreciation. Rare coins such as gold pieces formerly produced by the U.S. mint can have a collectible value that far exceeds the price of their gold content, due in part to their scarcity. Because rare gold coins like this will never increase in supply, demand could continue to drive their prices higher going forward.

Way To Invest No. 2: Gold Jewelry

Jewelry is the most common use of gold in the world, with about 49% of all the gold ever produced currently in the form of jewelry. The reason most gold comes in the form of jewelry is that it is always in demand. This means that investors in gold jewelry can benefit in two ways, both from enjoying the aesthetic beauty and potentially profiting from a rise in the value of the underlying metal.

Way To Invest No. 3: Gold Bullion

If you want to own gold in its purest form, you’ll be a buyer of gold bullion. Gold bullion can be purchased as bars or coins. Gold bullion coins are different from the collectible gold coins described above. Rather than being sought after for their collectible value, bullion coins are purchased simply for their gold value. Examples include the Canadian Maple Leaf and the American Gold Eagle, both of which contain 1 ounce of pure gold.

Way To Invest No. 4: Gold ETFs

Gold ETFs, or exchange-traded funds, own physical gold in their vaults. Shareholders own a percentage of this underlying gold in proportion to the number of ETF shares they hold. The price of a gold ETF trades in line with the current spot price of gold. Since you can buy or sell an ETF any time the stock market is open, gold ETFs are among the most convenient ways to buy and sell gold.

Way To Invest No. 5: Gold Miners

Gold mining companies are a way to play the gold market while still having some stock market exposure. Although the gold miners are loosely correlated with the price of gold, they also have business-specific factors that can drive their stock prices up and down. If you want to invest in a gold mining company, you should analyze not just the trend of gold prices but also the financial performance of the company itself.

What Are Troy Ounces?

If you’re buying any type of actual gold, you should understand that the gold markets use troy ounces for measurement as opposed to the more common avoirdupois ounces used for almost everything else. A troy ounce is a bit heavier than an avoirdupois ounce — 31.1 grams versus 28.35 grams, to be precise. For the purposes of investing, this is critical information because an unscrupulous dealer would be ripping you off if he or she sold you a 28.35 gram “ounce” of gold that should really be 31.1 grams.

What Is a Gold Karat?

A karat is simply a measure of gold purity. Jewelry that is 24 karat is 100% pure gold, while 12-karat gold is 50% pure. The remaining portion consists of either impurities or a different type of metal, typically to increase the alloy’s hardness since pure gold is quite soft. For example, an 18-karat gold ring, which is 75% gold, may be 25% silver, brass or bronze. This is important for investors because an 18-karat piece of “gold” should only be priced at 75% of the current spot gold price, give or take an adjustment for the value of the other metals in the alloy or dealer markups.

What Moves Gold Prices?

At the end of the day, supply and demand is what drives gold prices, although the underlying cause can vary. For example, if the stock markets panic and sink 10% in a day, the price of gold is likely to shoot up — not because gold inherently becomes more valuable in an instant, but because the demand for gold from investors is likely to skyrocket at the time. With a relatively fixed supply of gold, this increased demand translates into a higher price for gold.

Gold Prices Historically

For much of modern history, the price of gold was fixed. Up until 1971, the U.S. was on the gold standard, with gold prices set at $35 an ounce. After that, the price of gold floated freely, making it the investment option it is today. Thus, in terms of investment, gold is a fairly new commodity. As of Aug. 19, 2019, the spot price of gold had risen to $1,509.60.

Gold Market Performance

There are many ways to measure the performance of the gold market over time. On a strict price measure, gold has managed to keep up with popular indexes like the S&P 500 and Dow Jones Industrial Average. However, if you factor in the reinvested dividends of those stock averages, the total return picture tilts heavily in favor of the stock market. This doesn’t mean the gold market has not been a worthwhile investment, but it has traditionally been used more for hedging and diversification purposes rather than forming the core of a portfolio.

When Should You Not Own Gold?

For the average investor, gold may be good for diversification but it can be risky to own as 100% of a portfolio. There are numerous environments in which gold tends to trade flat or lower, including when interest rates rise, the stock market moves higher and the dollar is strong. Since gold doesn’t pay a dividend, flat markets are nearly as bad as declining ones. More than anything, it can be hard to predict the price of gold because it’s a commodity. With a stock, for example, the profits of the underlying company, which tend to drive stock prices, can be more readily ascertained than the supply and demand for gold. As a result, while gold can serve many investment purposes, it can be dangerous to own as a singular investment.

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This article originally appeared on GOBankingRates.com: 9 Reasons Why Gold Is a Good Investment in 2019