There are many reasons to consider adding gold holdings to your investment portfolio. The precious metal has a history of maintaining its value, making gold a useful hedge against inflation. Gold prices tend to increase when the U.S. dollar is underperforming or during times of economic and political uncertainty. Finally, gold can provide an important level of diversification to your portfolio, as gold prices have historically shown a negative correlation with other asset classes.

Gold prices can be volatile in the short term, but the metal has maintained its value over the long term. In general, movements in the price of gold depend on supply, demand, and investor behavior. Because the metal is often used to hedge against inflation, the pace of inflation—and market expectations for future inflation levels—can have an impact on gold prices. In addition, deteriorating economic conditions may bolster gold prices because the metal is seen as a relatively safe investment in difficult times.

The Bottom Line

Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it always has maintained its value over the long term. Through the years, gold has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well 

4 Ways to Buy Gold

Since the beginning of recorded history, gold has been a universal symbol of wealth. Because of its beauty and scarcity, ancient civilizations coveted the precious metal as a manifestation of status and power. Ornaments, jewelry, and early forms of money were all crafted from gold.

Over the intervening millennia, the fascination with gold has hardly diminished. While most monetary systems are no longer tied to a gold standard, the metal is still considered insurance against fiat currencies that rely on faith to sustain their relative values. Gold has maintained its intrinsic value because, unlike other currencies, there is a limited supply of it that can't be artificially increased.

The allure of gold has made it a desirable alternative for those seeking diversification and spreading of their risk. There are many ways to buy gold, both for decoration and as an investment. To many, it's also a hedge against economic upheaval, war, inflation, and global uncertainty.

Gold as an Investment

Before buying gold, it's important to understand some of the factors that make gold unique:

• Newly minted coins are typically 90% to 99% gold.
• Jewelry is typically 14-karat (58.3%) in the U.S. or 18-karat (75%) internationally, but other karat values can be found, all the way up to pure 24-karat (99.99%).1
• Gold provides no income stream unless you own stocks or mutual funds that pay dividends.
• Owning gold stocks does not entitle you to possession of the metal.
• You may incur a cost to store physical gold.
• While the current supply is limited, as the price rises, it makes more mining economically feasible, which could increase the gold supply.
• Demand isn't a function of the true need for the metal, because much of it isn't used for any commercial purpose other than the making of jewelry.
• Gold holdings are heavily concentrated among a limited number of governments and central banks, exposing gold to extreme price fluctuations as these institutions buy and sell.
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