Investing in Gold: Pros, Cons, and Getting Started
- Nisha Mehta, MD
- Oct 10
- 6 min read
Whenever gold prices go up, we see a flurry of posts within our physician communities about whether investing in gold is a good idea, and if so, how to get started with gold investments. Like any other investment, whether you pursue an investment opportunity is dependent on your overall investment portfolio strategy, your risk tolerance, and your financial goals. Below, we’ll cover why gold is such an important commodity, the pros and cons of investing in gold, and how to get started with investing in this commodity.
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Why is gold unique as a commodity, and treated differently within the investment market?
Unlike other commodities that are often invested in such as oil, gas, or grains, gold is not a resource that is consumed or used. Therefore, there is not a supply and demand market per se, and since it is never destroyed, the amount of gold will only go up over time.
However, on the other hand, gold has always been seen as valuable, and has throughout history been used as a form of currency and payment.
Why is gold so important and valuable in the global investment market, and what determines its price?
Gold is generally viewed as a hedge against inflation, which can also hold value when there is decline in the value of a currency. Until the 1970s, the US actually used gold as the basis for its monetary system, meaning that the amount of credit was linked to the amount of gold in the reserve.
What determines the price of gold is complex. Some things that influence the value of gold are more tangible, whether others are more emotional. Things that determine the value of gold include:
Mining production of gold - this affects the supply of gold
How much of gold is being held (and purchased by) central banks - this not only demonstrates institutional level confidence in gold, but also decreases the supply of gold available for purchase/investment by others
Institutional or macro level investment demand - similar to the central banks, interest by large institutional investors or demand in related ETFs or mutual funds can influence prices
The value of the US dollar - because it’s linked to the US dollar, a strong dollar can influence supply and demand. When the dollar is strong, international investors may have a harder time buying, potentially lowering demand and decreasing prices. Similarly, when the dollar is weak, international investors can buy more easily, potentially increasing demand and prices.
Inflation - given its role as a hedge against inflation, speculation about inflation can really affect demand, and by extension, prices
Interest rates - when interest rates are low, the opportunity cost of holding gold (which yields no interest) - is less, whereas when interest rates are high, high yield cash or savings accounts may seem more attractive.
Economic uncertainty and related emotion - there’s always an emotional component to investing, particularly with how market fears play into things. Since gold is a hard asset (as opposed to bills, which can simply be printed), many people look towards gold when there’s a lot of fear and market uncertainty, so during recessions or even depressions, gold tends to rise in value.
Consumer demand - when gold jewelry comes into fashion or when it’s marriage season in certain cultures, prices tend to go up
As you can see, there are lots of factors that go into where gold’s prices are, almost all of which are too big picture to result in control of where prices may go (unlike when you buy a stock because you have faith in an individual company).
Pros and cons of investing in gold
Benefits of investing in gold
Historically holds value and preserves capital over the long run since it's a hard asset (will probably never go to zero, though prices can fluctuate quite a bit)
Hedge against inflation
Diversification of your investment portfolio into alternative investments and commodities that may have less correlation with general index funds
Performs well in times of economic distress or market downturns
Now easier to invest in gold secondary to ETFs and other platforms that may not require you to physically store gold and insure against theft
Universally recognized as valuable worldwide and not as subject to devaluation by geopolitical threats or currency issues
Limited resource
Downsides of investing in gold
Not an income producing asset if bought as gold, as it doesn’t give dividends or interest unless you’re investing in a company that mines or otherwise deals in gold
Gold prices can be highly volatile based on emotion and global economic conditions
If you invest in physical gold, it can be expensive to store and insure against loss or theft
How can I invest in gold?
Fortunately, these days, there are plenty of ways to invest in gold that don’t require stockpiling it in a safe or burying it underground. Different ways to invest in gold, with pros and cons of each, include:
Physical gold - buying gold coins, bullions, and jewelry; have to worry about storage, loss, and theft, and may need to buy insurance
Purchasing Gold ETFs and mutual funds - doesn’t require storage, just buying a stock like you would buy any other stock, offers liquidity and convenience
Investing in companies that mine gold or gold related stocks - have to find the right companies, and this may be more volatile and subject to market trends, eliminating some of the pros of investing in gold, but may also offer dividends
Options/futures trading - this requires advanced knowledge and comes with risk, and may require larger amounts of capital - learn about options trading
Gold receipts - though this is less common these days, some private banks or ‘mints’ offer electronic tradable gold receipts that are backed by their own vaulted gold and which can be redeemed on demand
Outside of these options, be very careful, as there is lots of fraud, especially in the digital space. Make sure that you verify the credentials and history of anybody selling you physical gold, and be wary of anybody that claims to have an inside edge or disproportionate returns, or who will be storing gold on your behalf.
Other tips about investing in gold
While we aren’t financial advisors (and you should speak to one as needed), the following guidelines are worth thinking about:
Gold doesn’t yield dividends or interest, and appreciation is not historically proven over a certain period of time, so you should be careful about investing too large of a percentage of your net worth here or you may not benefit from the tried and true market performance in building wealth. Gold is suggested by many as a hedge against inflation or market volatility, or as diversification, rather than your primary investment.
Be careful about emotional investing - this should be a long term strategy for most investors rather than a short term play in response to surges or drops in prices (unless you have the experience and risk tolerance to think about options trading)
Pay attention to related fees such as within funds or for storage and insurance fees when deciding how to purchase
Conclusion
The hype behind investing in gold can vary with market sentiments, but it has a tried and true track record of being universally recognized as an item that has value dating back far into human history. Its benefits include being a hedge against inflation and market uncertainty, and offering diversification of your investment portfolio, but understand that this option doesn’t usually offer a lot in the way of income or predictable growth. As such, making it a large part of your portfolio may not be the best method to steadily progress towards financial independence.
Additional investing resources for physicians
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