On Oct. 30, 2024, the gold spot price reached a new zenith, precisely one year after club store Costco initiated the sale of gold bars on its website. These two events not only grabbed headlines but also sparked a broader interest in gold as an investment avenue.

Gold: A Versatile Asset with Caveats

For both novice and experienced investors, gold can find a place in their portfolios. However, it's crucial to note that gold doesn't behave like cash, stocks, or bonds. Hence, some learning is essential to utilize it appropriately. Let's delve into the gold investing process through four distinct steps.

Step 1: Understanding Gold's Characteristics

Gold stands out for its ability to maintain its value and even appreciate when other assets are on the decline. Investors often rely on this trait as a stabilizer. It helps limit unrealized losses in equities and offsets the inflation-related reduction in the purchasing power of cash deposits. Gold is also widely recognized as a store of value. In the event of a dollar collapse, it can potentially serve as a medium of exchange. As Scott Travers, the author of "The Coin Collector’s Survival Manual" and the editor of "COINage" magazine, aptly puts it, "gold is an insurance policy" against economic turmoil.

Step 2: Defining Investment Goals

Given gold's historical behavior, three suitable investment goals emerge. Firstly, it can act as a diversification tool by including an asset that moves independently of stock prices. Secondly, it provides protection against inflation-related loss of purchase power. Lastly, it serves as a backup source of value and wealth in an unlikely economic collapse. Allocation plays a vital role in portfolio composition. By setting target allocations for different asset types like stocks, bonds, and gold, one can manage risk over the long term. Asset values fluctuate over time. For instance, stocks appreciate. Without periodic rebalancing, one might end up overly concentrated in equities. Travers suggests holding 5% to 15% of one's net worth in gold. For risk-tolerant individuals, experts advise going up to 20%. A review of gold's historical behavior in light of one's risk appetite helps determine the right allocation percentage.

Step 3: Analyzing Gold's Market Cycles

Historically, gold has witnessed extended upcycles and downcycles. From 2009 to 2011, it was in a growth phase. Subsequently, it trended down for nine years without setting a new high. During these sluggish years for gold, a higher allocation percentage might dilute overall investment returns. If this is a concern, a lower allocation is more suitable. On the other hand, one might be willing to accept gold's underperforming years to benefit more in the good ones. In such a case, a higher percentage can be targeted. Recently, the precious metal has shown strength. Analysts at Goldman Sachs and JPMorgan believe this trend will continue at least in the short term. Factors such as increased central bank purchases worldwide, falling interest rates, and geopolitical events like rising tariffs contribute to this positive outlook.

Step 4: Choosing the Form of Gold Investment

Once the target gold allocation is determined, one must select a form of gold to hold. Three options are available: physical gold, gold mining stocks, and gold ETFs.Physical gold includes jewelry, gold bars, and gold coins. The advantages are manifold. If kept at home, it offers peace of mind as it can be used as a medium of exchange in an economic emergency. There are no added volatilities or ongoing fees. Gold mining stocks, on the other hand, tend to rise and fall with gold prices, but business-related factors enhance their volatility. Gold ETFs charge administrative fees in the form of expense ratios.However, physical gold also has its drawbacks. There is a risk of theft or loss, and it requires proper security. Whether stored at home or in a depository, gold can be stolen. In October 2024, Robert Leroy Higgins was found guilty of fraud charges after $50 million worth of precious metal disappeared from his business. Physical gold is also less liquid than stocks or ETFs. If not used as a medium of exchange, one might need to find a dealer and pay a markup on the sale.Owning shares in gold mining stocks provides indirect gold exposure. Large-cap gold mining stocks like Barrick Gold Corporation (GOLD) and Franco-Nevada Corporation (FNV) generally enjoy good liquidity with a narrow bid-ask spread. Stocks are easy to store in a brokerage account and don't consume physical space. This is an advantage in normal times but could be a disadvantage in an economic catastrophe if brokers or the stock market are temporarily shut down.The disadvantages of gold mining stocks include greater volatility. Since 2000, they have risen and fallen faster than gold spot prices. In recent years, even as gold has gained value, gold mining stocks have trended down. Additionally, they have no direct utility as a medium of exchange.Gold ETFs are funds that invest in gold mining stocks or physical gold. They are easy to store as they are essentially digital assets with no storage requirements. They also offer good liquidity as shares of popular gold ETFs like SPDR Gold Shares (GLD) are heavily traded. ETFs backed by physical gold can be less volatile than gold mining stocks or gold mining ETFs. However, they come with fund fees that dilute returns over time. For example, the expense ratio of SPDR Gold Shares is 0.40%, meaning $4 in fees annually for every $1,000 invested. And like gold mining stocks, they have no utility as a medium of exchange in an economic emergency.Finally, consider your investment timeline as a final suitability check. Gold can be volatile and has also experienced extended periods of decline. If the timeline is short, the risk of gold's price being down when you need to liquidate is too high. An extended holding period provides greater potential for reaching goals. For instance, hedging against stock market declines or inflation is a long-term endeavor. Holding gold as insurance against an economic calamity requires keeping the asset until it is needed. A small gold position can act as a stabilizer for your stock portfolio and purchasing power. If you choose physical gold stored at home, it can also serve as currency in the worst economic crises. Just remember that gold has underperformed stocks in the past, so choose your target allocation accordingly.