Why is it that every time the markets get rocky, people want to buy gold?

I dug into this question recently, and here is what I have found.

At the end of the day, people’s money worries are usually not just about the money. Money can stand in for protection and security in times of uncertainty. It’s about control and safety. Money is the walls and the moat of your castle, the only thing standing between you and wild hordes of savages… Or the next recession, whichever comes first.

So, when clients or prospects ask me about buying gold as an investment, my first step is to stop and understand what’s behind the question.

Scenario 1: World collapse

Are they worried about an apocalyptic scenario where regular money has become worthless?

Perhaps they imagine a future with severe inflation, where dollar bills are used as fire-starter or wallpaper. Or maybe a civil war has led to a complete collapse of the banking system. Or a global catastrophe has plunged us all into stone age with no electricity or running water. In those situations, gold may look like your ultimate store of value and the best means of “buying” the things you would need to survive.

If that is the client’s thinking, then our next step is to explore what that apocalyptic scenario would mean for their personal situation. If they are genuinely worried about the world as we know it falling to pieces, then they would need more than a few gold bricks.

At a minimum, they would also need to stock up on ammunition, non-perishable food, and antibiotics. And if they really wanted to be prepared, they would need to consider an off-the-grid bunker complete with solar panels for an independent energy supply, a water well, tools and seeds for growing their own food and keeping their own livestock, a loom for making cloth…

And yes, some gold to make trades would be helpful.

However, it would only be a small piece of the big survival picture. And if that’s what the client is thinking, then they need to consult with an off-the-grid survival or emergency preparedness expert, not just a financial advisor.

Scenario 2: Hedge against the markets

Some see it as a hedge. That’s what most of my clients mean when they ask me about investing in gold. They want to diversify their portfolio in the event that we enter a bear market (which is defined as a decline of 20% or more). They worry about watching all their investments drop in value at once, and so they lean into gold as an alternative. Or perhaps they (or someone in their family) have lived through hyperinflation in their country of origin. Or maybe they aren’t accustomed to trusting the banking system because they have personally experienced bank collapse and bankruptcy elsewhere in the world.

4 considerations before investing in gold

If a client wants to explore gold as a tool for diversifying their wealth, I usually share a few data points that they may need to know.

  1. Bear markets, even when they are prolonged and extreme, don’t last forever.If you go back and look at the history of the stock market since 1929, the markets have always recovered. Of course, timing is the big unknown here. If the recent COVID-19 crisis has taught us anything, it’s that bear markets can come and go in record-short times. They can also last. Nobody can predict with 100% accuracy when a bear market might start and when it might end. But so far, they have always ended — usually with a rallying bull market.1
  2. In the context of the world economy, gold remains one of the most difficult assets to price. Since gold does not produce a positive cash flow, it is very difficult to determine its value. What should an investor be willing to pay for something that has no intrinsic value? Some of the factors that influence the price of gold include the interest rates, oil prices, inflation, and the foreign exchange market. So, we can talk about gold being held as a hedge against those factors… but that relationship is rarely direct or linear.
  3. There is a big difference in owning gold vs. owning a gold mine.Our basic principle is to invest in things that are useful, i.e. things that serve a clear purpose or fulfill a need. In that definition, gold is inferior to some other precious metals. For example, silver has inherent value in medicine (for use in bandages, catheters, as a healing agent for burns, etc.), in electronics manufacturing, or in water purification. Contrast that with gold. Sure, it can be used to make jewelry, but it is difficult to find other practical uses for the yellow metal.
  4. Traditional gold bullion is difficult to store and transport. Now, investing in gold can take other shapes and forms (like stocks, exchange traded funds of ETFs, or future contracts). However, most people think of gold as physical bullions (i.e. 1,000-gram bricks made out of solid gold). As you might imagine, storing and moving those around can be impractical.

    If you saw a commercial on TV or an article online and are curious about owning gold as a piece of your portfolio, you need to consult with a financial advisor to make sure it makes sense for you. There is no one-size-fits-all way to invest, and your answer will depend on the specifics of your financial goals, resources, risk tolerance, and needs.

Bottomline takeaways

  • If you are concerned about an apocalyptic scenario and want to invest in gold as a means of exchange for future transactions, consider all implications of that vision of the world… not just the investments side.
  • If you are worried about being unable to meet a specific financial need because of a bear market, talk to your financial advisor! There may be a strategy to potentially remove enough money off the table to help you pay your bills independent of what the market does — without necessarily buying gold.
  • Remember that gold is not insurance. You may think of gold as a hedge against the uncertainty of the world, but there is no guarantee of its value in a crisis. Insurance is a legal contract that entitles you to certain payments when certain conditions are met (for example, if you have fire insurance and your house burns down, the insurance company will pay to help you rebuild or buy a new house). Gold is a speculative investment and you should talk to your financial advisor before buying.


 – Miriam Falaki, CFP® | Wealth Advisor

As measured by the S&P 500 there have been 37 corrections between 1950 and 2019. In all 37 instances the market regained and surpassed its pre-correction high. Source: FactSet, NBER, Robert Shiller, Standard & Poor’s, J.P. Morgan Asset Management.
Guide to the Markets – U.S.
Data are as of March 31, 2020.
The Stock Market Has Done This 37 Times Since 1950