Depending on your preferences and ability to assume risk, you can choose to invest in physical gold, gold stocks, gold ETFs and mutual funds or speculative futures and options contracts. Regardless of the form of gold you choose, most advisors recommend that you don't allocate more than 10% of your portfolio to it. Don't you want to delve too deeply into individual gold companies? So buying an ETF could make a lot of sense. ETFs for gold miners will introduce you to the biggest gold miners in the market.
Since these funds are diversified across the sector, the poor performance of any miner won't hurt you much. Adding gold to your portfolio can help you diversify your assets, which can help you better weather a recession, but gold doesn't produce cash flow like other assets and should be added to your investment mix in a limited amount and with caution. Since gold has historically shown a low correlation with other types of investment assets, many investors include gold in their portfolios as protection against potential economic downturns. The potential benefits of gold as a hedge against declines in other asset classes may come to the fore for investors when faced with the likelihood of a recession.
But while he is clear that he doesn't think investing in gold is a good idea, Smith does recognize the attractiveness of physical metal. However, for the average gold investor, mutual funds and ETFs are now generally the easiest and safest way to invest in gold. Even so, gold mining companies can offer a safer way to invest in gold than through direct ownership of ingots. Investing in gold stocks, ETFs or mutual funds is often the best way to expose yourself to gold in your portfolio.
Gold is reputed to be a recession-friendly investment when the stock market retreats sharply and the price of gold often rises. There is too big a difference between the price of most jewelry and its value in gold to be considered a real investment. Instead, the average gold investor should consider mutual funds and gold-oriented ETFs, as these securities generally provide the easiest and safest way to invest in gold. Other investments in gold, such as mutual funds, can be made in smaller dollar amounts than bullion and may also not have as much direct price exposure as bullion.
For example, some investors might choose a gold mining company that practices strong environmental responsibility rather than one that doesn't. Finding the most suitable gold investment for your portfolio depends on your investment resources and objectives. While investing in gold in a recessive environment can bring benefits, its effectiveness during a recession or at any other stage of the business cycle will depend on how it fits into your overall investment strategy. This contrasts with the owners of a business (such as a gold mining company), in which the company can produce more gold and therefore make more profits, increasing investment in that business.
Gold is considered a “safe haven asset” because when the prices of other investments, such as stocks or real estate, fall sharply, gold doesn't lose its value.