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Gold versus stocks: where should I invest?

As the Covid-19 pandemic engulfed the world in 2020, the allure of investing in gold has skyrocketed. Whenever a crisis (be it political upheaval or a natural disaster) occurs or economies wobble, the argument for buying gold gains traction. There is a degree of truth to this, as gold has acted as a safe haven for investors for millenia. When uncertainty prevails, owning something tangible and glimmering provides a sense of comfort. Nevertheless, dumping all other forms of investments in favor of gold may not be the safest option even in times of war. As with most things in life, the answer to the question whether one should invest in gold or stocks is not straightforward.
 

Gold versus stocks
The case for gold

Gold is still a vital part of the global economy, even though it no longer backs the US dollar (or any other currency). For example, several central banks around the world and international organizations such as the International Monetary Fund hold gold reserves on their balance sheets. Most experts advise that individual investors should keep gold in their portfolio as a means to diversify their investments and also as a safe haven. Retail investors have a wide range of options to invest in gold, including purchasing physical gold in the form of gold bars (also known as bullion), buying into gold ETFs and mutual funds, as well as purchasing shares of gold mining companies, to name but a few. Like all investments, gold comes with a host of risks and costs, so the timing of your purchases of gold-based assets and the type of instrument you choose are vital to securing returns.

Gold versus stocks
The case for stocks

Buying stocks is undoubtedly one of the most popular ways of investment worldwide. For many people, it is synonymous with growth investment. The case for stocks is a solid one: if you choose your investment wisely, stocks can yield spectacular returns, with some of them also paying dividends.

Gold versus stocks
Gold versus stocks

The arguments in favor of both forms of investment are numerous. 

Stock investments can produce regular income and grow in value depending on the business performance of the specific company. Many stocks pay dividends; and even companies that don’t pay dividends often reinvest their profits to ensure that their business grows, thus generating additional returns for shareholders down the road.

Gold has also many arguments going for it. It often functions as a hedge against stock holdings and has a tendency to perform well in times of global upheaval or a worldwide economic downturn. Because both the stock and gold markets are subject to high volatility, there can be periods when gold outperforms stocks, sometimes significantly. For instance, the global Covid-19 outbreak and the resulting economic uncertainty have led to a rally in gold prices. Nevertheless, gold can be an imperfect hedge against stocks, as evidenced by the Covid crash of 2020 when gold also fell initially as market participants had to liquidate their gold positions at any price to cover losses elsewhere.

Gold versus stocks
Bottom line

Unless you have specific reasons for not investing in one or the other, the most sensible solution is to include both gold and stocks in your portfolio and re-balance them from time to time (i.e. sell one asset high and buy the other low). Over the very long run, it is expected that a broadly-diversified portfolio of quality stocks (not randomly selected penny stocks) will outperform gold if you do buy and hold both (see chart below). Note, however, that no investment is bulletproof. As gold’s performance is tied to real interest rates, there will be times when both the stock market and gold prices will suffer; for example at times of rising real interest rates that are not underpinned by high growth in the economy.

Author of this article

Edith Balázs

Author of this article

Edith is an experienced financial journalist having worked for 15+ years as a correspondent for Bloomberg, Dow Jones and The Wall Street Journal covering macroeconomics, stock, currency and fixed income markets. She holds a master's degree in American Studies and Journalism.

Edith Balázs

Senior Editor

Edith is an experienced financial journalist having worked for 15+ years as a correspondent for Bloomberg, Dow Jones and The Wall Street Journal covering macroeconomics, stock, currency and fixed income markets. She holds a master's degree in American Studies and Journalism.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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