What Alternative Investors Need to Know About Gold

December 8, 2021

Gold is more than just a pretty metal for jewelry. It’s also one of the largest financial assets in the world, with an average daily trading volume of $183 billion. It has also shot up in value in recent years, climbing from $460 per ounce in 2000 to $1,815 per ounce in August 2021.

But not all that glitters is gold—and if you’re going to invest in gold, you need to know your way around gold investing.

Here’s a quick review of the basics for new investors, plus a few ways that you can get started in gold investing.

The Basics of Gold Investing

Since ancient times, gold has been a precious commodity. It was the stuff of kings and the currency of choice. And while global economies no longer operate on the gold standard, gold investing still offers considerable value to savvy investors. In fact, many top investment advisors recommend investing in commodities—including gold—to help protect your portfolio.

Here are a few ways gold investing can fit into your overall investment strategy.

Gold as a Wealth Preserve and Hedge

For thousands of generations, gold has served as a reliable wealth preserve. And while the future of money may be more digital than our ancestors, gold is still a reliable wealth preserve—and it functions as a wealth preserve in a way that modern currency simply doesn’t.

That’s because gold is a remarkably effective hedge against inflation.

Let’s say it’s 1970, when one ounce of gold was worth $35. And let’s say you could either hold onto that gold or you could convert it to cash and hold onto $35 in cash. Fast forward to 2021, when the cost of a single ounce of gold is $1,815. Even in 2000, when the cost of an ounce of gold was $460, it dramatically outstrips your returns from converting the gold to cash. Moreover, the same $35 you had in 1970 gets you far less in 2000 than it did in 1970, and it gets you even less in 2021.

Part of the reason why this hedge is so effective, especially for U.S. investors, is that global gold prices are set based on U.S. dollars. This happens for two reasons. One, investors have to sell their U.S. dollars to purchase gold, which ultimately drives down the value of U.S. dollars. Two, a weaker dollar makes gold cheaper for investors who hold cash in other currencies. Either way, gold functions as a hedge in two directions: against rising inflation and against a declining U.S. dollar.

Gold as a Safe Haven

In this respect, gold often functions as a safe haven. Or, if you prefer, a rescue asset.

Think of it this way: the world will always have ups and downs. Political, economic, environmental, you name it. There’s no way of knowing what the future holds—or even what your cash will be worth in the future. Many currencies have collapsed throughout history, leaving holders with worthless paper.

But gold has been a reliable value store for centuries. If a currency takes a downturn, or even collapses outright, other currencies recognize the value of gold, and gold can still hold its value in the face of economic strife. That’s why investors throughout history have relied on gold as a safe haven during turbulent times.

Gold as a Diversifying Asset

That is not to say that gold should be your entire portfolio. Every healthy portfolio is based on diversification.

But if you’re looking for a handy diversification tool, gold is a good way to go.

Like other alternative investments, gold has little correlation to the stock market, which makes it useful during volatile markets. And because it’s a powerful value store, it’s an excellent insulator to protect your portfolio against losses.

Ways to Invest in Gold

Ready to get started in gold investing? You have a lot of options available.

The classic option is gold bullion, high-purity gold stored in the form of bars, coins, or ingots. It’s often kept as a reserve asset in national banks. However, gold bullion can be any form of pure or nearly pure gold certified for purity and weight.

That’s a good thing, considering that the size of gold bars (up to 400 troy ounces) makes them illiquid. Think of it this way: if your entire investment in gold lies with a single bar, you can’t exactly saw off the end of the bar to free up cash. Most bullion owners hold smaller bars or coins.

If you’re not eager to keep physical gold laying around or you’re leery of hunting down legitimate gold sellers, a more accessible option is to invest in gold-based ETFs or mutual funds. When you purchase a share, it represents a fixed amount of gold. But unlike an ounce of gold, a share can be easily bought or sold on the stock market just like a regular stock. This also makes ETFs and mutual funds a more cost-effective option for new gold investors.

If you have a high risk appetite and know your way around investing, another option is to invest in gold via futures contracts. Like shares, they represent a fixed amount of gold, but the point of a futures contract is an agreement to buy or sell a commodity at a predetermined price at a specified future date. The amount can be quite large, so this option is only suitable for investors who know what they’re doing and have enough assets to navigate the contract settlement.

Looking to Get Started in Alternative Investment?

For the savvy alternative investor, gold investing offers a smart avenue to diversify and strengthen your portfolio. But as in all forms of investing, it pays to have an expert in your corner.

Here at Masterworks, we like to think of ourselves as your expert partner in the world of blue-chip art investing. We handle the research, authentication, and purchasing (with some help from our research partners at Citi Bank and Bank of America) so that you can purchase shares in multi-million-dollar art and collect dividends when we make a sale. Ready to get started? Fill out your membership application today to learn more.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.