As gold prices soar, experts explain how to use it for long-term wealth

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• The value of gold is at an all-time high. 
• Investors can use gold as a hedge against inflation and economic uncertainty. 
• Diversifying with gold protects you against market downturns while helping preserve wealth.
• Buy bullion coins and gold bars online with All American Assets.

The price of gold surged to a record high in October, continuing a strong bull run that has persisted throughout 2024. 

“Gold was hitting price records even before the Fed started cutting rates,” says Philip Patrick, precious metal specialist at Birch Gold Group. He explains that high global demand from central banks and general dollar devaluation since the pandemic has driven the price of gold. “Interest rates have an effect,” he continued, “but I don’t think they’re the main driver today.”

Gold has historically underperformed compared to market-linked investments like stocks and index funds over the long run. Although it’s not as profitable as higher-risk securities, experts say investing in gold is best used as a means of further portfolio diversification and a hedge against inflation.

Consider adding gold to a diversified portfolio 

Diversification aims to reduce portfolio risk and volatility by investing in different asset classes. This strategy helps protect your portfolio from significant losses caused by the underperformance of a single investment. A more diverse portfolio is better equipped to weather market fluctuations.

A general rule of thumb for diversifying your portfolio with precious metals is to invest between 5% and 10% of your portfolio in physical gold. Although it varies from person to person, said Drew Martino, wealth manager at Savvy Advisors, he generally does not recommend allocating more than 10% of any portfolio to alternative investments, including gold. 

“I think it’s still a great time for the average investors to consider buying gold if they already have an established portfolio of stocks and bonds,” Martino said. However, he continued, “I wouldn’t recommend investing in just gold if you don’t already own any other assets.”

Other options to consider are gold ETFs and mutual funds. Compared to owning physical metal, gold funds offer greater liquidity. However, you don’t actually own the gold. Moreover, you’re still subject to mark risk as the value of your gold fund largely depends on the company managing the fund.

Sustainable investing focuses on building a solid foundation with time-tested assets that withstand various market conditions. When diversifying your portfolio with gold, “do your due diligence, do your research, and get the information so you can go into it as informed as possible,” Patrick said. “That will put you in the best position.”

You can also use gold as an inflation hedge 

“When faced with challenges like inflation, currency devaluation, or an impending recession, there’s often an increased demand for safe-haven commodities designed to preserve purchasing power,” Patrick said. 

Physical gold is one of these “safe-haven” assets. As inflation erodes the dollar’s purchasing power, driving up prices, gold tends to appreciate, making it an attractive investment for those seeking protection from market downturns.

“Gold can still be volatile, but it has an intrinsic value and purchasing power,” says Martino. “It’s referred to as a safe investment because it tends to fare better when stocks decline or during periods of inflation, but all investments hold some risk.”

However, gold isn’t leverage. You won’t generate income from dividends or interest. Price appreciation is the only way you can build wealth with physical gold. 

Chuck Etzweiler, CFP and senior vice president of research at Nepsis, cautioned against purchasing gold based on the idea that it’s a viable strategy for building wealth. He recommends viewing gold as a currency hedge rather than an investment strategy. 

The gold bull run won’t last forever

Gold appreciates over time, making it an attractive investment for those seeking to lessen the impact of violent market swings. Over the long term, gold prices tend to rise due to sustained global demand. However, the US dollar’s purchasing power will likely recover and eventually outpace gold as the economy strengthens.

The S&P 500, for instance, has historically averaged an annual return of about 10% since its inception in the 1950s. In 2023, the index delivered an impressive annual return of 26.3%. In contrast, gold’s 10-year annualized return stands at 4.57%, and its 2023 annual return was 13.1%.

“The greatest risk of investing in gold lies in the opportunity cost,” says Patrick. “Gold may underperform when the economy is strong compared to higher-yielding stocks and market funds. While gold is a popular investment, investors, especially those in the accumulation phase, should avoid over-investing in any asset, including gold.”