Many investors are looking to diversify their investment assets, and improve their overall returns, by adding a gold allocation to their investment portfolio. In the current economic environment, amid rising inflation, major bank failures, a volatile stock market, and widespread overall economic uncertainty, both individual investors and professional market analysts see gold as a “safe haven” investment—a hedge against a potential economic downturn.

Gold has a strong historical track record as a reliable store of value and as an investment asset that tends to outperform when the stock market and the economy as a whole are showing weakness. It’s particularly well known for being an asset that keeps pace with—or even outpaces—inflation.

Allocating part of their investment capital to gold can enable investors to create a more well-diversified portfolio, as gold tends to have a negative correlation to other investment assets, such as stocks. Therefore, when other components of an investment portfolio are suffering losses, investments in gold (and silver or other precious metals) may be enjoying gains that can help to offset those losses. A properly diversified portfolio can help to reduce both risk and volatility and can also aid in maximizing total return on investment.

What is Gold Allocation?

There are actually two definitions of “gold allocation”. The first simply refers to committing some portion of your investment capital to investments in gold. The second meaning relates to different ways of owning and holding gold as an investment. In that sense, “allocated gold” refers to specific gold assets that are identified as solely the property of an individual investor. If an investor owns allocated gold bullion, for example, there are specific bullion bars that belong to the investor and that are segregated from other bullion bars that may be held in the same vault.

In contrast, unallocated gold is gold that is held in a storage facility, such as a bank, that is not the physical property of any specific investor. Investors have a receipt or other document showing their interest in, or right to, a certain portion of all the gold held in a depository, but the investor doesn’t own any specific piece of the gold bullion.

Investing in unallocated gold typically offers the advantage of lower investment cost, but it carries the third-party risk that if the storer of the gold becomes insolvent, the gold investments of individual investors may be lost if the stored gold is used to settle the storer’s debts or other financial obligations. With allocated – or segregated – gold, the investor can take physical possession of their specific gold assets at any time.

Essentially, allocated gold refers to an investment in physical gold, while unallocated gold refers to a paper asset, rather than a physical, tangible asset.

Why Invest in Gold in 2023?

Gold is the only financial asset that has been universally recognized as a reliable store of value throughout recorded history. Extending back thousands of years before the rise of the Roman Empire, gold has always been a treasured asset and a commodity used as a medium of exchange. And, unlike fiat currencies, which can be printed in trillions at will, gold is a finite, scarce commodity resource.

Reasons to Invest in Gold

• Gold is a proven store of value and a scarce, finite commodity resource
• Gold as a commodity has practical value as an essential element in computers, cell phones, and other electronic components
• Gold tends to outperform during periods of rising inflation and economic uncertainty
• Central banks and institutional investors have been buying up gold at a record pace
• Most market analyst projections for gold’s price per ounce between now and 2030 range from $3,000 to $10,000 – that’s from a possible 50% increase to a possible 500% increase

Gold’s value is enhanced by the fact that its unique density (of approximately 19.3 grams per cubic centimeter) and electrical and thermal conductivity properties have accorded it significant practical value ever since the dawn of the industrial revolution. The precious metals, gold and silver and platinum, aren’t just shiny and pretty – they’re essential components of the primary technologies that our world runs on - computers, cell phones, and circuit boards.

Gold has historically proven itself to be a good investment, especially during periods of high inflation and during economic downturns. Amid all the current economic uncertainty, one thing is certain – no major economy is eyeing a rosy future at the moment. Gold’s “safe haven” characteristic was rarely more evident than during the worldwide financial crisis in 2008-2009. During that time frame, while the stock market crash saw major market indexes decline by almost 50%, gold did the exact opposite - soaring by nearly 50% to the upside. Previously, while the stock market was relatively flat or down throughout the 1970s, the price of gold, during the same time period, soared from $40 an ounce to nearly $900 an ounce.

Fears of a possible banking crisis, spurred by the collapse of SVB and by costly rescues of Credit Suisse Bank and First Republic Bank, have recently increased investors’ appetite for gold, driving the price to near the $2,000 per ounce level.

The effectiveness of gold as a hedge against inflation is starkly reflected in the vast difference between the current price of gold and its price approximately a hundred years ago, when gold was a mere $20 per ounce. The gigantic change in the nominal price of gold belies the fact that, in real terms of purchasing power, the price of gold hasn’t really changed very much. The massive rise in the price of gold is due less to gold actually becoming more expensive – and more due to paper currencies such as the US dollar having depreciated in real value. In terms of purchasing power, the US dollar’s value has declined by almost 98% since the 1913 creation of the Federal Reserve.

Central Banks are Buying Gold at a Record Pace

Another reason to invest in gold might be because that’s what the entities that generally have their fingers on the most accurate pulse readings of current and probable future worldwide economic trends are doing. Both large institutional investors and central banks are allocating significantly more capital to investments in gold.

The World Gold Council reports that central banks across the globe bought more gold – more than 1,000 tonnes, approximately $70 billion worth – in 2022 than in any year on record as far back as 1950. And that represents a significant shift from the stance of central banks 20 to 30 years ago, when they were regularly net sellers of hundreds of tonnes of gold each year. Nearly 80 percent of central bank gold purchases worldwide occurred after July of this past year – beginning around the time that the first alarming inflation numbers appeared in the US.

This notable trend change in the gold-buying practices of central banks began concurrent with the 2008 financial crisis and the introduction of massive quantitative easing (QE) measures that vastly increased the money supply in most developed and major emerging economies. It has also occurred in tandem with part of another overall worldwide trend of central banks – outside of the United States’ own Federal Reserve Bank – of diversifying away from holding massive amounts of US Treasury securities.

The graph below shows both the prevailing buying trend over the past decade and, notably, the very sharp spike upward in 2022, the year when US inflation hit levels that hadn’t been seen for more than 40 years (hitting an annual average of 8.38%).

The most active gold buyers in 2022 included China, Russia, India, and Turkey. Both China and Russia have been pursuing strongly aggressive programs of accumulating gold for several years now.

Many investors and market analysts expect gold to be an outperforming asset over the next decade. Average analyst projections for the price of gold within the relatively near term – the next two to three years—are around $3,000 per ounce, which represents more than a 50% increase over its current price. Some precious metals analysts see gold soaring to a much higher price between now and 2030 – with forecasts ranging between $5,000 and $10,000 per ounce.

Gold Investing Options: Ways to Invest in Gold

There are numerous investment vehicles, several different types of financial assets, that investors can choose from to obtain exposure to gold. When considering the various gold investments available, investors need to consider a couple of the primary factors that differentiate one gold investment from another – first, investing in physical gold versus paper gold assets, and second, what type of investment account to hold gold investments in.

Ways to Invest in Gold – Noteworthy Characteristics

Investing in Paper Gold Assets Versus Investing in Physical Gold

Many gold investments are available in the form of paper assets, such as gold mining stocks, gold commodity futures, and mutual funds or exchange-traded funds (ETFs) that are invested in gold.
ETFs are a typically low-transaction-cost investment option that can provide exposure to gold in a number of ways, and that don’t require investors to physically purchase and store gold. Buying shares of an ETF can be an easy way of creating a portfolio of different gold investments, thus giving investors broad exposure to gold assets. Some gold-focused ETFs aim to mirror changes in the spot price of gold, by investing either in physical gold or in gold futures contracts. Some funds hold a combination of physical gold and gold futures. However, it’s important to note that even ETFs that are solely invested in physical gold are still paper assets rather than actual investments in physical gold, such as gold bullion.
Other gold ETFs aim to profit from a rise in gold prices by investing in gold mining stocks. Some of these types of ETFs are passive investments that track a gold market index – such as the DBIQ Optimum Yield Precious Metals Index, while others are actively managed ETFs that aim to identify and invest in gold stocks that generate the highest possible returns on investment.

Physical Gold Assets

The alternative to investing in paper gold assets is investing in actual physical gold. Physical gold investments are available in many forms, including gold bullion bars, gold bullion coins (such as the popular Gold American Eagle coins), collectible coins (such as the $20 Saint-Gaudens Double Eagle gold coins or Liberty Double Eagle coins), and gold jewelry.

Gold bullion, in the form of either bars or coins, is the most common physical gold investment, as it typically sells for the lowest premium over the spot price of gold.  However, even some bullion coins - such as proof coins, which are produced using special, high-quality minting that results in brighter and more sharply defined coin surfaces – may command relatively high premiums over the spot price of gold, as compared to buying basic gold bullion bars.

Gold bullion bars are available in a wide range of sizes – from just a few grams up to hundreds of ounces. The most commonly purchased bullion bars are one-ounce bars and ten-ounce bars. While investors can invest in bullion bars that are less than one ounce, unlike stocks, there’s no option to buy a fractional share of a bullion bar. Since buying gold bullion represents a sizeable investment (a 10-ounce bullion bar currently costs around $20,000), it’s critical to know that you’re getting genuine, high-quality gold products, with the bar’s purity and weight as advertised. Therefore, investors are advised to always purchase bullion bars or coins produced by reputable mints, such as the U.S. Mint, the Royal Mint in the UK, or Credit Suisse.

The most common gold bullion coins are one-ounce coins, such as Gold American Eagle one-ounce coins, Chinese Panda coins, or South African Krugerrands. Decades ago, Krugerrands were the most widely traded gold bullion coins (in fact, the term “Krugerrands” was more or less synonymous with “gold coins”). However, since their introduction in 1986, Gold American Eagle coins have become the most prized and most widely bought and sold. The 1991 ½ ounce Gold Eagle coin is one of the most sought-after, as it has the lowest mintage amount of any Gold Eagle coin produced to date. Both investors and bullion dealers pay attention to the mintage numbers for each American Eagle series of coins produced each year – with dealers putting significantly higher price markups on low mintage coins.

Collectible gold coins usually benefit more from substantial increases in the per-ounce price of gold than bullion bars or coins do. For example, a $50 increase in the spot price of gold per ounce might result in a $150 increase in the price of a given one-ounce collectible coin. However, the level of demand – and, therefore, the market price – for any specific collectible coin is a highly volatile factor, which makes it difficult for investors to accurately forecast future price levels. For this reason, most investors usually focus on acquiring gold in bullion form. Gold coin collectors are often more focused on acquiring particular coins they want rather than on viewing gold as an investment.

As with buying collectible coins, buying gold jewelry as an investment can carry substantially greater risk than investing in gold bullion products. Investors have to conduct due diligence in finding a reputable dealer to buy investment jewelry from, and should always try to obtain, with any purchase of gold jewelry, documentation of its origin and quality. Without adequate certification of the purity and weight of gold in a piece of jewelry, investors may have a difficult time securing a fair price when they try to sell a gold jewelry item. Also like collectible coins, gold jewelry carries notably higher markups over the spot price of gold. A very well-designed piece of gold jewelry might sell for three or four times the value of the gold contained in the piece.

Goldbacks

A relatively new form of physical gold is something called Goldbacks. Goldbacks are a form of gold foil currency that is currently being produced in a handful of states – Nevada, Utah, Wyoming, and New Hampshire. Goldbacks are a thin sheet of pure gold (24-karat, 99.9% purity) that resemble in appearance a currency note. They are rendered in a variety of intricate designs that have made them something of a collector’s item. Since their introduction in 2019, their increase in value has outpaced increases in the spot price of gold almost double. Goldbacks have become such a sought-after form of gold that, if you shop online for them, you’ll see that although there are always some available, several dealers’ listings read “out of stock”. 

Goldbacks are produced in denominations from one (1/1000th of an ounce of gold, equivalent to $2 USD if gold is at $2,000 per ounce) to 50 (1/20th of an ounce of gold, equivalent to $100 USD with gold at $2,000). Because the sheets of gold are so thin, each Goldbacks note is encased within a protective plastic cover to keep it from tearing. Goldbacks are intended for use as currency. If you travel through one of the states where they are minted, you’ll likely see “Goldbacks Accepted Here” signs popping up as you travel through the state.

 

Investing in Gold Through a Regular Investment Account vs. Tax-Advantaged Retirement Account

The personal investment goals of an individual investor will be a key determinant in their gold investing strategy, driving their choices of what specific types of gold assets they want to invest in, and also in how their gold investing is structured.

Investors seeking maximum speculative investing profits over a short- to medium-term time frame will want to use a regular stock and/or futures investment account that enables them to trade in and out of the gold market, either day trading or in accord with swing highs and lows in price action. However, such investors need to be wary of incurring the highest investing tax rates, those applied to short-term capital gains when investments are held for less than one year.

Alternatively, other investors may look to buy and sell physical gold in the form of gold bullion bars or bullion coins, or may prefer to trade collectible gold coins. An increasingly popular gold investing vehicle for investors who are operating with a significantly longer investment time horizon is a gold IRA. A gold IRA is a self-directed IRA (SDIRA) that holds physical gold investments. A gold IRA offers an advantage over other types of retirement accounts, such as a 401(k), in that it holds physical, rather than paper, assets – something that’s not possible with most other retirement accounts.

A gold IRA is a tax-advantaged investment. With a traditional IRA, taxes on investment profits in the account are deferred until the investor begins making withdrawals, either upon retirement or, if they wish, after reaching the age of 59 and a half. The accumulated profits for investors who opt for a Roth IRA structure are completely tax-free as long as the investor abides by all the IRS rules for gold IRAs. The IRS has strict rules that govern gold IRAs: 

• Gold assets purchased for a gold IRA have to meet the IRS minimum gold purity standard of being at least 0.995% pure gold.
• The gold must be stored in IRS-approved vault facilities.
• A gold IRA must be administered by an IRS-approved custodian trustee. (The investor makes all the buy and sell decisions on gold in a gold IRA, but the buy or sell trades that an investor wishes to make must be executed by the account trustee. The trustee is also responsible for submitting required reports to the IRS.
  A good custodian trustee helps to ensure that investors avoid possible tax penalties and obtain maximum tax benefits from their gold IRA.

Advantages of Owning Physical Gold vs Paper Gold Assets

Investing in physical gold offers investors several significant advantages over gold investments in paper assets such as stocks or mutual funds.

• Physical gold offers extra investment security, as it’s much less vulnerable to hackers or identity thieves.
• Physical gold can be held anonymously. In the current times, when investors are rightly worried about increasing government intrusion, that can be an important advantage. Governments can easily seize, for example, money held in a bank account. In fact, that’s exactly what happened to millions of citizens of Cyprus in 2013 – the country’s central bank confiscated millions of dollars held in individual bank accounts, without warning and literally overnight. Account holders had no recourse to recover their deposit account funds.
• Physical investment assets are also much more protected against seizure or attachment by creditors.
• Finally, investments in physical gold aren’t subject to any counterparty risk. Most other investments are at least partially exposed to the actions of third parties, such as the CEO or board of directors of a company in which an investor holds stock. In contrast, the intrinsic value of gold is independent of third-party actors.

What's the Ideal Gold Allocation in an Investment Portfolio?

For investors who have decided to allocate some portion of their investment portfolio to gold, the question arises of how much of their investment capital to devote to gold investing. Recommendations on this point vary widely. Some financial advisors recommend committing no more than one or two percent of an investment portfolio to investments in gold. At the other end of the spectrum are advisors who, in today’s highly uneasy economic climate, essentially urge individuals to convert virtually every dime they have into one form or another of gold.

So, what is the ideal gold allocation in a well-diversified investment portfolio? There’s no single, objective, exact “right” answer to the question. The answer to the question, “What’s an ideal allocation of gold in my investment portfolio?”, will be different for different investors, based on factors such as their personal investment goals, investing time horizon, and risk tolerance.

Following are some opinions on the subject from several investment professionals who are recognized as expert investors and gold market analysts:

• 7.5% - Ray Dalio is a billionaire investor and the founder of the largest, and one of the most profitable, hedge funds in the world, Bridgewater Associates. He is known for creating several fund management quantitative strategy components, such as risk parity and currency overlay. A long-time advocate of investing in precious metals, Ray recommends allocating approximately 7.5% of one’s investment capital to gold.
• 5% - Greg McBride is a Chartered Financial Analyst (CFA) and the Chief Financial Analyst for the well-respected personal finance website, Bankrate.com. His “Money Makeover” series is a comprehensive personal finance course that is designed to help investors create a properly diversified investment portfolio, manage their spending and debt, and plan for retirement. A frequent guest on financial shows on the Fox Business Network and CNBC, Greg believes that a 5% gold allocation is appropriate for an overall portfolio for most individuals.
• 5% - Kevin O’Leary is a Canadian investor and television personality. He anchored a number of Canadian business news shows, and has been featured on the entrepreneurial reality show, “Shark Tank”. His investment endeavors include being on the board of the private equity firm, Genstar Capital, and co-founding O'Leary Funds, a global yield-focused mutual fund company. Other ventures include O'Leary Mortgages and O'Leary Fine Wines. Kevin states that 5% of his investment portfolio is allocated to investments in physical gold. He is not an advocate of investing in gold stocks because, as he states, maintaining a strong cash flow position is very important to him, and stock investments may take years to come to fruition. Kevin’s reputation has suffered recently, due to his being a paid spokesperson for the now-defunct crypto company, FTX. Although O’Leary stated on CNBC in 2019 that Bitcoin is a “useless currency”, in 2021 he stated that he had 3-5% of his portfolio allocated to Bitcoin.
• 10% - James Rickards, a Wall Street veteran for more than 30 years, has long been a champion of investing in gold and a critic of the Federal Reserve. He is the author of several books on world economics and investing, including, “The New Case for Gold” (2016), and is also the editor of the investment newsletter, “Strategic Intelligence”. Rickards recommends committing at least 10% of one’s capital to gold and favors physical gold assets over paper assets.

Summary: Consider Allocating Gold to Your IRA

Many investors are increasingly considering allocating a significant portion of their investment portfolio to gold. The primary reasons for the upsurge in gold investing can all be found in the current economic environment of rising inflation, a volatile stock market, and overall economic uncertainty. Gold has an established history as a reliable store of value and as a hedge against inflation.

Financial advisors and market analysts commonly recommend an allocation of gold between 5 and 10 percent of one’s total investment capital as part of a well-diversified investment portfolio.

There are several different types of gold investments for investors to choose from, including investments in gold stocks or ETFs, gold futures, gold bullion, and gold coins. Each type has its own relative advantages and disadvantages. 

Holding physical gold offers several distinct advantages over investing in paper gold assets. Investors can pursue gold investing through a regular brokerage account or through a tax-advantaged retirement account such as a gold IRA. An individual investor’s personal financial goals, risk tolerance, and investment time horizon will likely be key factors in determining exactly how they want to go about adding gold to their overall investment portfolio. Remember to speak to your financial advisor before making any investment decision, and to never invest more than you can afford to lose. 

Gold Allocation Frequently Asked Questions (FAQs)

Is gold a good investment in 2023?

Gold has historically outperformed other investment assets during periods of rising inflation and economic and market uncertainty. It also provides a way to substantially increase investment portfolio diversity, as gold is usually negatively correlated with other investments, such as stocks and bonds.

What’s the best way to invest in gold?

Investors can choose from many different ways to invest in gold – including gold bullion and coins, gold stocks, and gold futures. The “best” way to invest in gold for any individual investor will depend on their personal investment goals, time horizon, and risk tolerance. Physical gold offers some significant advantages over paper assets – it’s less vulnerable to online theft or seizure by government authorities or creditors, and it typically carries the lowest premium markup over the spot gold price.

Can I invest in physical gold in a retirement account?

Retirement accounts such as 401(k) plans and pension plans can’t usually hold physical assets such as gold bullion. However, a Gold IRA can hold physical gold investments. There are companies that specialize in providing gold IRA services to investors.

How much of my investment portfolio should I allocate to investments in gold?

Many precious metals market analysts and financial advisors recommend allocating somewhere between 5-10% of your investment portfolio to gold. Speak to your financial advisor to find an allocation that works best for your financial situation.