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Ironically, the saying, “All that glitters is not gold,” sometimes comes to mind when investing in the precious metal. While some investors are more skeptical than others about its actual value, it’s important to weigh all the facts.

Consider this: from 1983 to 2004, inflation averaged roughly 3%, but the nominal annual return on gold over that time was –0.3%. Add an inflation adjustment and gold lost more than half its purchasing power over a span of 22 years. This is only one example of how gold has functioned on the market, but it's nonetheless something to keep in mind.

Gold has also been seen as a safe investment by others. Many gold investors harken back to times of crisis, such as the most recent Great Recession. Since it's a physical asset, gold can be seen as good to hedge against crisis but, as the previous example has underlined, may not be against inflation.

With conflicting opinions about whether or not gold is actually a safe investment, it’s important to understand how it functions. We’re here to help break down some of the basics of gold investment to see whether it’s right for you.

Who Drives Gold Demand?

In order to understand gold’s actual value, you need to know the players involved. Who's actually using gold out there and driving its value as a commodity?

Well, for starters, the jewelry industry. Pretty obvious one, right? That gold ring or bracelet you own is part of the reason why jewelry makes up roughly 50% of gold demand. Another 40% comes from physical investment from people and banks. The last 10% percent can be generally attributed to industrial use for things such as dental fillings or computer cables that use gold.

What this means is that gold prices are essentially driven by supply and demand. That said, gold is not something that can be grown or artificially produced, so there’s a limited supply available. This is where its physical nature can actually be detrimental to a certain extent as that is what gives it intrinsic value.

Does Physical Gold Make Investments Easier?

Some people’s natural inclination would be to go out and buy some gold in the form of bars or coins and sit on them. While we can see why people might think this way, it can actually cause more problems than it solves.

Not only is there a big markup on jewelry and you’ll likely end up paying top dollar for it, but there’s also the question of where you keep it. If you’re holding on to gold bars for a crisis, it’s not a great investment method per se. Furthermore, in the event of a serious crisis, there may be more of a focus on stockpiling things such as batteries, solar panels, chickens, a garden, oil, and gasoline. Gold simply won’t buy you much in the event of a catastrophe.

Think About the Bigger Picture of Gold

If you’re still interested in investing, gold does have the ability to create a more diversified portfolio. Adding a small amount of gold to a stock and bond portfolio of no more than 10% can help increase diversification and the ultimate safety of the entire portfolio. That said, while it may lower volatility, it can also lower return.

At the end of the day, the choice is up to you. However, chatting with a financial advisor is always a good idea if you’re planning to invest for things like retirement planning. Don’t assume that since prices are good right now that they’ll stay that way. Speaking with a financial advisor will help you navigate all the risks and rewards involved.

If you’re interested in investing in gold, we’re here to help. Our trusted team of financial advisors will give you all the information you need to make the best decision for your future. Contact us today!