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As inflation continues to erode the buying power of paper currency, savvy investors have been turning to gold to preserve the value of their portfolios and accumulate wealth.
Unlike cash, which has decreased in value over the decades, gold has seen steady gains, making it a smart way to protect and even grow wealth. For example, if you purchased an ounce of gold in 1970, it would have cost around $35. That same ounce of gold would be worth more than $2,000 in 2023.
Given that the value of the dollar has decreased while gold has steadily increased, it has led to the question, “Is gold the secret to generational wealth?”
The short answer is that it depends, and there are several other factors to consider if your goal is to build generational wealth with gold.
Gold’s Investment Performance Across Generations
The historical performance of gold has had a general upward trajectory, starting mostly in the 1970s. The decade had been characterized by economic uncertainty, high rates of inflation, and geopolitical tension. This, on its own, made gold a very desirable product, but in 1971 something else happened that made gold even more sought after: the U.S. abandoned the gold standard.
Gold prices reached a peak in 1980 and then experienced a gradual decline that lasted a couple of decades. That trend reversed in the early 2000s, when gold began appreciating again in the face of the financial crisis and concerns about currency stability. By 2011, gold prices had reached a new high.
Over the past decade, gold has had its ups and downs, and the pandemic nudged gold prices to another new high of nearly $2,000 an ounce in August 2020. As the global economic landscape continues to show instability, gold prices are expected to continue rising, at least in the short term.
Why Has Gold Always Been Valuable?
Gold has been considered valuable since the early days of civilization as a medium of exchange and a store of value, as well as for jewelry and artifacts.
Gold’s perceived value across millennia has been due to its beauty and relative scarcity. Also contributing to its substantial value is the difficulty of extracting it from mines and other sources.
This precious metal also has several practical uses across several industries, such as electronics, automotive, aerospace, and the medical field.
While the above reasons explain gold’s historic value in society and its associated cultural perceptions, it is also considered especially valuable in modern times in cases of economic uncertainty and the threat of economic collapse, where gold can be used as a reliable means of exchange.
What Makes Gold Attractive for Building Generational Wealth?
Gold and generational wealth are often associated together because of gold’s scarcity, inherent value, and effectiveness as a hedge against inflation.
Specifically, investors interested in using gold for long-term financial success and generational wealth-building point to the following benefits:
- Store of value: Because gold is expected to remain valuable and its physical properties make it resistant to corrosion and decay, it can be a suitable method for long-term wealth preservation.
- Diversification: Any investment carries risk, and effectively implementing gold investment strategies can reduce that level of risk. Often, gold’s performance in the market is contrary to other investments, which can result in mitigating portfolio volatility.
- Hedge against inflation: As discussed above, inflation can erode the value of fiat currency, while gold has historically shown resistance to declines in purchasing power. During periods of high inflation, gold can be an effective way to hold onto wealth.
- Hedge against crises: In today’s modern world, there always seems to be a new crisis, from the pandemic to war. These crises tend to result in economic volatility, and gold can be considered a safe-haven asset during these times.
- Intergenerational transfer of wealth: Gold can easily be passed down to future generations, and it tends to be considered an asset with timeless value.
What Are the Potential Risks of Investing in Gold?
The risks of investing in gold are similar to those of other types of investment vehicles, though gold has some unique nuances.
Before investing in this precious metal, it is wise to be aware of the following potential risks:
- Price volatility: Despite its relative price stability, gold can undergo massive price swings, especially in the face of global events.
- Market sentiment: Because gold prices are often influenced by how the market feels about economic and geopolitical risks, changes here can result in sudden price movements.
- Lack of income generation: Gold doesn’t provide interest or dividend income, which can lead to a significant opportunity cost compared to other investments.
- Storage and insurance fees: Holding significant amounts of physical gold isn’t free because you’ll need secure storage, and you may want to insure your gold as well. There are costs associated with this.
- Regulatory risks: The government may change its position on gold on a dime, so to speak, by, introducing new taxes or even requiring that citizens turn in their gold, which actually happened in 1933.
- Timing and entry points: Like any investment, finding the right timing for buying can be an educated guessing game. The adage “buy low, sell high” is the goal, but practically applying these principles without a crystal ball is challenging.
- Lack of liquidity: Unlike stocks, crypto, and other “paper” assets, gold is not quite as liquid. It still does have liquidity, especially in smaller forms like coins, but it may not be as liquid as other investment alternatives.
How Much Gold Should Be in Your Investment Portfolio?
If you are interested in investing in gold in the long-term, you’re probably wondering how much of your portfolio should be allocated to gold. There is no single right answer here, as all investors are different. It is often a good idea, however, to diversify a portfolio with a variety of asset classes, including the following:
- Real estate
- Precious metals
- Alternative investments
In general, financial experts often recommend a range of 2% to 10% of your portfolio consisting of gold, but this is not a strict rule, and you may want to speak to a financial advisor before making a final decision.
To determine the best ratio for you, it is important to know your investment goals and risk tolerance. It’s also advisable to look at market conditions and the current economic environment. For example, if the economy is in crisis, it might be wise to hold more gold than you would otherwise.
No matter what allocation you decide, be sure to keep an eye on your portfolio and make adjustments as necessary. In particular, adjust your portfolio based on changing market conditions, economic factors, and your individual circumstances.
Utilizing a Gold IRA for Long-Term Wealth Preservation
Wealth preservation with gold is possible through several different channels, not merely holding physical gold. For example, a gold IRA, also known as a precious metals IRA, allows investors to hold physical gold as part of a retirement portfolio.
Gold IRAs are often used for diversification as well as wealth preservation, and gold IRAs come with several tax advantages. Further, you do not necessarily need to hold physical gold to have a gold IRA. You can also have a self-directed IRA using paper assets such as:
- Mutual funds
- Gold ETFs
- Stocks in gold mining companies
- Commodity futures