Why is Gold Desirable During Times of Economic Uncertainty?

There’s been a lot of talk about economic uncertainty. Even though the US economy has been showing signs of improvement (albeit slow and small improvement), there are plenty of other concerns. China’s growth seems to be slowing somewhat, and there are continual worries about the eurozone.

And, of course, we can’t forget the fiscal cliff in the United States.

There are lots of reasons that investors are a little nervous about the next few years. In times of economic uncertainty, many investors turn to gold for some of the following reasons:

Tangible Asset

Gold is tangible. From the earliest days of civilization, gold has been seen as valuable. It is shines up nicely, and it doesn’t rust. It has been used as money and a sign of wealth for thousands of years.

And you can hold it in your hand. If you invest in small gold coins and bars, or in quality gold jewelry, you can even carry it around fairly easily.

When many investors start worrying about fiat money, and the fact that the value changes on whims, and that you can’t actually touch most of the money in circulation today, the idea of a tangible asset, gold, is appealing. While, technically, the value of gold is subjective, and changes according to market conditions and demand, many investors still find it comforting to invest in something they can hold in their hands during times of economic uncertainty.

Related: Is It Time to Buy Gold Again?

Hedge Against Inflation

With all all of the efforts to stimulate the economy that have taken place in the last few years, there are some very real fears that there will be too much success. With all of these attempts to stimulate the economy, there are concerns that inflation could be a concern.

Inflation is an erosion of purchasing power. It represents a de-valuing of currency, and results in higher prices. That dollar you have now may not be able to buy the same amount of goods and services in five years.

Gold is often seen as a hedge against inflation. Generally, gold moves inversely to the greenback. As the value of the US dollar falls, gold often rises. The idea behind investing in gold now is that it can be a hedge against inflation, protecting purchasing power, down the road.

Safe Haven Asset

Gold is often seen as a safe haven asset in troubled times. Many think of gold as stable, even with some of the changes to value. When investors are concerned they buy up gold, and other precious metals. (Silver is becoming popular right now, since it often moves with gold, but costs significantly less.)

With economic uncertainty, many investors see gold as a constant — something that will always have worth, even if the economic system completely collapses. The idea of gold is a powerful, particularly physical gold (not just investing in a gold ETF or in gold stocks).

Related: The Risk and Rewards of Investing in Gold

Before You Invest in Physical Gold

However, there are some things to consider before investing in physical gold, no matter how smart you think it is:

You need a safe place to keep it. You either need to keep it with you, or pay for storage someplace else. In the event of a true disaster, you will have to be able to get to your gold, and it’s stored elsewhere you may have difficulty.

It’s taxed at a different rate. In the United States, physical gold is taxed at the collectible rate, which is 28% right now. So, even if you have had those gold coins long enough to be considered “long-term”, you won’t get the preferred long-term capital gains rate if you decide to sell your gold at market value.

In the end, gold, like any other investment, needs to be carefully considered before you add it to your portfolio. Consider your long-term investing goals, and whether or not you think gold will help you reach them. Many investors benefit from having a portion of their portfolios invested in gold, or in gold-related assets. Think about what works for you, and what is practical in your situation, and then make a decision about whether or not gold investing is right for you.