Adding Gold to Your Portfolio

March 11, 2024 Advanced
Are you looking to include gold in your portfolio? Learn about different alternatives and their pros and cons.

Gold has been considered a medium of exchange for thousands of years. It's also an asset class some investors might consider adding as part of a diversified portfolio.

There are several ways to buy gold, including direct purchase, investing in companies that mine and produce the precious metal, and investing in gold exchange-traded funds (ETFs).

Gold as an investment

Gold has an emotional attachment that can make it different from other investments. It's tangible and has been considered valuable for centuries.

Some advisors recommend gold as a way to add diversification to a traditional portfolio of stocks and bonds. Why? One answer is gold's low correlation to traditional assets, which proponents say can potentially act as a hedge against systemic risk, especially during periods of stress in stock and bond markets. The chart below demonstrates how the yellow metal can see both periods of correlation as well as divergence with the stock market.

Correlation and divergence

Chart shows the relative performance of gold futures versus the S&P 500® index (SPX) from 2008 to 2022. The two chart lines have long periods of divergence with occasional periods of correlation.

Source: thinkorswim® platform

But diversification alone shouldn't be the basis for adding gold as an investment. Plus, there's no guarantee that diversification will eliminate the risk of loss.

If you're considering adding gold to your portfolio, you should approach the decision with the same care and consideration you give any of your financial decisions.

Ways to add gold to your investment portfolio

Gold coins and bars

Traditionally, ownership of the physical product—gold coins and bars—is the most common way to invest in gold. Buy coins or bars from a dealer that you trust, and then put them away for safekeeping. One important note to remember is you need to ensure that any coins and bars you purchase meet your preferred purity standards.

Markups and commissions on physical gold sales can be high, and depending on where you live, you may pay sales tax on the purchase as well.

The storage of physical gold can also potentially be an issue. Are you willing to keep your gold at your home, where it may be at risk of theft, fire, or natural disasters? Some companies offer to store your gold for you, and you can always get a safe-deposit box at the bank, but in both scenarios, you'll be charged a fee and may not be able to access your gold quickly if you need to sell it on short notice.

Gold mining stocks

Gold mining companies come in two different sizes: junior and major. Junior miners are companies that are newer or more speculative, often mining unproven claims. Major miners are more established companies with production and infrastructure in place, mining on proven and sustainable claims. Both categories include publicly held companies that you can find using the stock screener at schwab.com or on the thinkorswim app.

The theory behind buying mining stocks is if the price of gold goes up, the profit margins of the companies potentially go up as well, which may be reflected in their stock prices. But the price of gold is only one component of the underlying value of these companies. Factors like geopolitics, cost of energy and labor, and even corporate governance can impact the profitability of individual mining firms but not necessarily the price of gold. As with any investment, it's important to do your research before investing.

Gold ETFs and other exchange-traded products

Exchange-traded products (ETPs), such as a gold ETF or exchange-traded note (ETN), can offer exposure to the precious metal, but not all ETPs are alike. Some involve physical ownership of the metal, while others use futures, options, and other investments to attempt to mirror the investment profile of owning gold. Tax implications depend on the type of product you get, and some ETPs have liquidity restrictions.

Before investing in an ETF, be sure to carefully consider the fund's objectives, risks, charges, and expenses. Please read the prospectus carefully before investing.

Gold futures and options

When investing in gold via futures or options, you're using leverage to control a larger amount of the commodity than you could with just your initial margin requirement. This can be an efficient way to participate in gold price fluctuations—up or down—depending on whether you're bullish or bearish on the market.

Gold futures may respond to stock market volatility, and some investors migrate to them as a possible hedge when stocks become volatile. When investing in gold futures and options, it's important to understand the different characteristics associated with the pricing of futures and options. Plus, leverage works both ways. It can turn a small amount of money into a large gain, but the reverse is also true—any losses are magnified as well as the potential to lose more than your initial investment.

Bottom line on investing in gold

Gold can provide a way to add alternative assets to an investor's portfolio. However, before moving forward, investors need to consider their portfolio strategy and which products make sense and feel most comfortable to their investing objectives.

Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. Investments in commodity-related products may subject the fund to significantly greater volatility than investments in traditional securities and involve substantial risks, including risk of loss of a significant portion of their principal value.

Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products. Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC. Futures, futures options, and forex trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.

Charles Schwab Futures and Forex LLC (NFA Member) and Charles Schwab & Co., Inc. (Member FINRA/SIPC) are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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