Gold tends to do well in times of trouble. Many wealthy fund managers advise on putting a larger amount in gold, even today. After all, even after coming under pressure from higher interest rates and outflows from gold exchange-traded funds (ETFs), analysts think the outlook for the shiny metal remains bright this year.
Indeed, 38 analysts surveyed by the London Bullion Market Association forecast gold prices to average $1,974 an ounce in 2021. That's about 13% higher than current prices, and would represent a return to levels not seen since August 2020.
Just understand: Pouring a chunk of your assets into gold isn't always a good idea. In fact, gold actually has a spotty long-term record as an investment.
Since 1980, Which Investment Has Generated the Best Returns?
Gold? Nope. Maybe U.S. bonds? Wrong again. Large-cap stocks traded in the U.S. have easily outperformed those asset classes over the past four decades.
Read MoreLet's go to the tape: From March 1980 through March 2021, the S&P 500, with dividends reinvested, returned an annualized 12.1%. As for bonds, the benchmark 10-year Treasury note delivered an annualized return of 6.6% over the same period. But gold? It hasn't been quite so lustrous, returning an annualized gain of just 2.8% during that span. Even more recently, gold still has underwhelmed. The S&P 500 put up an annualized return of 13.8% with dividends reinvested over the past decade ended March, while benchmark Treasuries returned 2.2% and gold 3.1%.
Since 1990, Which Investment Performed Best?
Once again, U.S. stocks beat both U.S. bonds and gold.
From March 1990 through March 2021, the S&P 500 gained 10.4% on an annualized basis with dividends reinvested. The 10-year Treasury note delivered an annualized return of 4.6%. Gold, meanwhile, generated an annualized return of 5.2%. Interestingly, gold is supposed to be bulwark against rising prices, but when adjusted for inflation, the commodity performed even worse.
Adjusted for inflation, the S&P 500 returned an annualized 7.9% from March 1990 through March 2021, including dividends. The 10-year Treasury generated an annualized return of 2.2%. Gold adjusted for inflation delivered only 2.7% annualized.
Note that the price of gold actually dropped about 27% between 1989 and 1999. Gold often loses value in prosperous times, as the 1990s generally were.
What About Since 2000?
The 21st century has been gold's time to shine. From March 2000 through March 2021, gold generated an annualized return of 19.1%. Adjusted for inflation, that comes to 14.7% annualized.
However, let's not forget that gold dropped to $208 an ounce in 1999 from $595 in 1980 and $401 in 1989. Once again, gold’s price fell during a period of economic prosperity: the 1990s.
Stocks came in second over the same period, with a return of 6.8% annualized, including dividends. (Or 4.7% after factoring in inflation.) Equities were the victim of the bursting of two bubbles – the tech bubble early in the century and the real estate and credit bubbles starting around 2007.
Benchmark Treasury notes came in last during this period, with a 3.6% annualized return, or 1.5% in inflation-adjusted terms.
Gold Isn't the Inflation Hedge It's Cracked Up to Be
The price of gold doesn't track inflation, as a general rule. Between 1987 and 2001, as inflation fluctuated around 3% a year, the price of gold dropped.
But it is true that during periods of extraordinarily high inflation, gold’s price may soar.
That’s what happened from the mid-1970s through the early '80s, when inflation crept from 4.8% in 1976 to 13.3% in 1979 and 12.4% in 1980, before beginning a long descent. The price of gold leapt from less than $150 an ounce to more than $800, then collapsed to $400 by 1981.
But Gold Can Indeed Be a Good Hedge in a Crisis
Gold can soar in value during hard times, when investors are fearful and uncertain and seek safety. Just look at the diverging paths that stocks and gold took in 2020 amid the outbreak of COVID-19.
When the pandemic-fueled selloff in stocks finally bottomed out on March 23, the S&P 500 was sitting on a year-to-date loss of more than 30%. Gold prices, however, held firm. By March 23, they were up about 1% for the year-to-date.
And then the real fun began. Gold went on a tear over the next four-plus months, rallying 36% through Aug. 6 when it hit an all-time high of $2,067.20 an ounce.
As noted above, the 21st century has given gold several opportunities to shine. The turmoil that followed the Sept. 11, 2001, terrorist attacks and continuing through the 2008-09 economic meltdown was bullish for gold investors. It's not unusual to see gold’s price rise with bad news (such as the global pandemic or a sovereign debt crisis) and drop with good news (such as better-than-expected economic growth).
Gold Isn't the Most Precious of Precious Metals
Gold is the most popular precious metal for investors, but it's not the most expensive. That title actually belongs to rhodium, which has soared to all-time highs in 2021 and currently fetches $26,200 an ounce.
Indeed, of the major precious metals, gold comes in fourth by price per ounce, behind rhodium, iridium and palladium, but ahead of platinum and silver.
What is a Gold IRA?
If you want to hold physical gold in an IRA, it can't be your regular account. It has to be a separate, special one, called a Gold IRA.
Also known as a precious metal IRA, a Gold IRA works pretty much like a standard individual retirement account: the same contribution limits and distribution rules. However, instead of holding paper assets like stocks and bonds, the Gold IRA is earmarked for holding physical bullion — that is, coins or bars of gold and other approved precious metals, including silver, platinum, and palladium.
Gold IRAs can also contain gold stocks (shares of gold mining/production companies), gold mutual funds that invest in bullion or stocks (or both), and gold ETFs that track gold indexes.
How to invest in a Gold IRA
If you want to hold physical gold in an IRA, the first step is to open a self-directed IRA (SDIRA) — one that you manage directly — with a custodian. The custodian is an IRS-approved financial institution (bank, trust company, brokerage), but many financial services and mutual fund companies who handle regular IRAs don't do the self-directed version.
You also need to select a precious metals dealer that will make the actual gold purchases for your IRA (your custodian may be able to recommend one).
Keep in mind that not every self-directed IRA custodian offers the same investment choices, so make sure physical gold is one of their offerings before you open an account. You can set up the SDIRA as either a traditional IRA (tax-deductible contributions) or a Roth IRA (tax-free distributions).
The next step is to fund the account with a contribution (subject to contribution limits, of course), a transfer, or a rollover from a qualified plan, such as 401(k), 403(b), or 457 plan.
After that, you can select investments for the account, and your custodian and metals dealer will complete the transactions on your behalf.
You can't just buy any bar or ingot, either. Physical metals must meet IRS “fineness” standards as their purity and weight, and be stored in an insured IRS-approved depository. When it comes to coins, you are limited to bullion coins issued by certain government mints.
(sources: kiplinger.com, businessinsider.com)