Investing in gold

The Scrooge McDuck way

We’ve talked a lot about the reasons for investing in gold – but don’t forget that these could all work in reverse. Gold may be a good hedge against inflation, but that means it could perform poorly in an environment where inflation is falling.

Similarly, gold’s price tends to struggle in scenarios where nominal bond yields are rising, where the US dollar is strengthening, and where investors are becoming more comfortable with taking risks at the expense of stuffy old safe havens.

Gold, as discussed, can help protect your portfolio during times of market stress; it can help offset losses when stocks or bonds are falling. Unfortunately, however, this relationship doesn’t always hold up during massive selloffs.

These often involve investors selling their most readily tradable assets – such as gold – in order to meet “margin calls” – demands from their broker that enough cash be raised to cover possible losses. As investors flog their gold to make ends meet, the metal’s price may also drop, at least temporarily – as seen during the March 2020 meltdown.

And with that final word of caution, we’ve reached the end of this learning guide. You now have a good understanding of the principal factors driving the price of gold, the reasons investors are fond of the stuff, and how you can go about taking the Scrooge McDuck 🤑 plunge yourself. Gold luck!

In this guide, you’ve learned:

🔹 Gold was one of humanity’s first currencies. Since governments separated its value from that of modern money, gold has been viewed more as an investment.

🔹 The price of gold is mainly driven by government bond yields (higher yields = gold lower), inflation (higher inflation = gold higher), the US dollar (strong dollar = gold lower), and overall investor sentiment (more risk-averse = gold higher).

🔹 Investing in gold can provide an inflation hedge, protect a portfolio during times of economic and/or geopolitical turbulence, and supply an additional source of return that’s largely uncorrelated with other major asset classes.

🔹 You can back gold by buying physical gold coins or bars, purchasing gold futures contracts, investing in gold ETFs, or even by picking up gold miners’ shares.

🔹 But you should also be aware of the potential risks. As well as unfavourable macroeconomic conditions, gold may fail to provide portfolio protection during large market selloffs.

Now test your knowledge and take the quiz!

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Keep in mind that when you invest your capital is at risk and this learning guide is for information purposes only and is not intended as investment advice.