Gold as Diversification Insurance
With inflation rising and the supply chain still in a state of relative chaos, many investors are looking for ways to diversify their portfolios.
They’re looking for hedges against inflation, and they’re also looking for stable investments that offer a way to ride out the storm.
Enter the concept of gold diversification. Gold offers the inflation hedge that investors are after, and it also offers a stable long-term value that can actually rise significantly in a down economy.
So how do you get it? There are several ways to add this kind of diversification to your overall investment strategy, but as you might expect they all come with tradeoffs.
Let’s break them down, then, to give you a better idea of what you need to know and how to use it effectively.
Start with a gold IRA. It’s an easily-available conservative investment, especially if you’re older and IRAs are a substantial part of your overall investment strategy to begin with.
The biggest benefit of a gold based IRA is probably the hedge against inflation, but don’t bet against the price of gold going up again, either, as the pandemic continues to force new restrictions. If you’ve been leaning into investments that take a beating when inflation goes up and the economy tanks, gold IRAs are a simple way to use gold to diversify your portfolio.
ETFs and Mutual Funds
You can also consider exchange-traded funds and mutual funds as a way to get diversification. What you get when you buy these is a fixed amount of gold—say, a tenth of an ounce—the value of which you then trade, just like you would a stock.
They can also be purchased from brokerages, which makes them less expensive, and this makes them more cost-effective than buying bullion bars or gold coins. The fees are also cheaper, checking in with an expense ratio of approximately 0.65 percent, which is lower than the ratio for plenty of other investments, including mutual funds.
Speaking of mutual funds, you can go that route if diversification as a whole is more important to you than using gold as a vehicle, but be aware that the focus on gold will be lower as a general rule.
Only a few mutual fund companies focus exclusively on gold, but if you can find one you like it’s a great way to diversify by using several different companies. This also eliminates the need to do a lot of individual company research, which is an important consideration for many time-stretched investors.
Gold Futures and Options
Another way of using gold to diversify is to go with gold futures and options. With these, you’re entering a contract to purchase a given amount of gold on a set date.
Gold futures tend to be a more expensive point of entry, so many experts consider them a more viable vehicle for experienced investors. They are riskier than most gold investments, but the commissions the brokers get are low, and the margin requirements for gold tend to be significantly lower than they are for most conventional equity investments.
Options also give you a chance to buy a specific contract within a defined time frame at a price that’s preset. It generally takes more capital to buy these options, but options let you leverage your original investment and limit your losses so that they’re tied to the price you paid. They’re volatile, but if you know what you’re doing they represent a solid way to use gold to diversify.
Gold Mining Companies
You can also consider investing in gold mining companies, but this takes some homework and research.
You need to know if the companies hedge against a drop in gold prices as part of their business practices, and this requires an analysis of each company’s prospectus along with an examination of track record.
If you’re up for the task, though, it can be an interesting and profitable way to go.