Investors often mistakenly pit gold and the stock market against each other when trying to determine the best investment option. In reality, both assets have something unique to contribute to an investment portfolio. Gold can a reliable hedge against inflation with impressive price stability while the active stock market offers high return potential. Exploring the advantages and considerations of gold and the stock market can help readers make informed investment decisions in line with their specific goals.
Gold vs Stock Market: Asset Type
The entire stock market consists of paper assets. In other words, when you invest in a company’s stock, you receive a paper representation of your ownership rather than something physical. This lack of tangibility means stocks have no inherent value. That’s why the performance of the stock market is dependent upon the health of the overall economy. When inflation rises, debt increases and other economic indicators turn south, stocks tend to fall precipitously.
In contrast to the stock market, gold comes in both paper and physical forms. Paper gold assets such as gold ETFs and mining stocks offer indirect exposure to the gold market and suffer from the lack of intrinsic value like all paper investments. However, physical gold boasts inherent worth based on its high purity, exceptional demand, and historical performance. Within the realm of physical gold, investors have a lot of asset choices in the form of bullion bars, coins, rounds, and rare coins.
Gold vs Stock Market: Volatility
Ever since the abandonment of the gold standard in the 1970s, the US economy and all related assets like the stock market have lacked physical backing. Without a strong financial foundation, stock prices can be influenced by a wide range of factors including inflation, news events, market sentiment, rate hikes, and geopolitics. This leaves the stock market subject to violent and unpredictable swings as the conditions impacting its health are constantly evolving.
Gold has always been used as a buffer to this volatility because of its remarkable price stability. There’s a reason countries pegged their currencies and economies to this precious metal for centuries. Gold’s inherent value is secured by constant demand and ongoing recognition regardless of the external economic climate. This security and stability continue to attract investors looking to shore up their wealth against the volatility of the stock market.
Gold vs Stock Market: Inflation Hedge
Gold is the superior choice for investors seeking to hedge against inflation. This precious metal has a long track record of maintaining and even gaining value during periods of economic downturn. The stock market, which is directly tied to the performance of the broader economy, is highly susceptible to inflation, which erodes the value of currencies. As paper assets, stocks lose value in direct proportion to the US dollar’s depreciation.
These tendencies are made clear by looking at the US economy’s worst bouts of inflation. Through the stagflation of the 1970s, gold prices went from just below $36/oz to over $675/oz, representing a nearly 20x jump. During the same period, the stock market barely moved, with the DOW going from 744.06 points to 875.85 points. The most recent recession caused by relentless money printing and spending during the COVID-19 pandemic has sent stocks into a downward spiral while gold demand skyrockets.
Gold vs Stock Market: Income Generation
Income generation is an important distinction between gold and the stock market. The only way gold generates returns is through capital appreciation which investors realize when selling their assets. Stocks offer a greater range of income generation through dividends and interest payments which companies offer to encourage investors to hold their stocks.
However, stocks with lower growth potential typically offer dividend yields or interest rates which can effectively nullify the advantage. These additional forms of stock market income are entirely dependent upon the performance of a company which can reduce, pause, or even cancel their dividend or interest payments at will.
Gold vs Stock Market: Liquidity
Gold and stocks are considered highly liquid assets. Investors usually have no trouble acquiring or offloading these assets due to their high demand and universal recognition. Paper gold and stocks are especially easy to buy and sell given their digital form. Investors can complete trades with just a few clicks, making it easier to take advantage of short-lived economic conditions or to respond quickly to financial emergencies.
Even in its physical form, gold is viewed as a liquid asset. Retail investors, institutional players, and even central banks are always looking to acquire more physical gold given the unpredictable nature of traditional markets. The standardized gold spot price and the uniformity of gold bars and coins make for quick evaluations and smooth transactions. This investment flexibility is unique for tangible assets which tend to take longer to buy and sell.
Gold vs Stock Market: Storage
Similar to funds in a bank account, stocks are digitally represented within brokerage accounts. Since physical space isn’t a factor, there’s virtually no limit to the number of stocks an investor can hold. This digital framework is incredibly convenient and prevents investors from having to worry about storage, but it isn’t without risks. Brokerage accounts can be vulnerable to malware, phishing attacks, and other cyber threats.
Paper gold in the form of gold ETFs, gold mining stocks, or gold certificates is also fully digitized. However, physical gold comes with unique storage considerations. Investors need to find a place to securely house their tangible gold assets to prevent theft, damage, or accidents. Whether you’re investing in a safe for at-home storage or paying a custodian to hold gold products on your behalf, investing in physical gold comes with additional storage costs that need to be taken into account.
Gold vs Stock Market: Counterparty Risk
When you purchase a stock, you’re entrusting the performance of your investment to a variety of third parties including brokers, clearing houses, and businesses. Counterparty risk is the potential for these parties to default on their financial obligation. For example, a company you own shares of could fail to meet their dividend payments or file for bankruptcy. Whether you’re investing in an individual stock, ETF, or mutual fund, you’re exposing yourself to a certain amount of default risk.
Alternatively, gold doesn’t expose investors to nearly as much counterparty risk due to the nature of the investment. The performance of gold doesn’t rely on the financials of a company, the savviness of a business owner, or the health of an industry. Physical gold assets hold inherent value which has always steadily increased over time. The only time gold investors might confront counterparty risk is when organizing a storage solution. However, sticking with reputable providers with proper insurance coverage can mitigate these potential risks.
Gold vs Stock Market: Retirement Planning
Stocks create the bedrock of retirement plans for the vast majority of investors. Their popularity and convenience make them highly appealing to people looking for low-maintenance retirement strategies. Plus, the IRS allows inventors to enjoy tax-deferred growth through stocks with a variety of plans such as traditional IRAs and 401(k)s. Through a Roth IRA, wealth accumulated through stocks can be withdrawn tax-free during retirement. Despite these advantages, building a nest egg entirely with stocks is highly risky due to their volatility and unpredictability.
Contrary to popular belief, it is possible to diversify your nest egg with gold while securing the same tax benefits of standard retirement accounts. Through a gold IRA, the IRS permits investors to put tax-advantaged dollars towards gold assets along with other physical precious metals. This optimizes the return investors can realize from gold assets while protecting their retirement savings from market uncertainty.
👉 Related reading: How a Gold IRA Works
Gold vs Stocks: Which is the better investment?
Gold and stocks aren’t mutually exclusive investments. A properly diversified portfolio contains both assets to secure the high return potential of stocks while hedging against inflation with the inherent value of physical gold. The proper allocation between gold and stocks will vary based on an individual’s budget limitations, risk tolerance, and investment goals.
Learn More About Investing in Gold
If you’d like to learn more about investing in gold, claim a FREE copy of our Precious Metals Investment Guide. It covers everything you need to know about purchasing gold, silver, and other precious metals for a more diversified, resilient, and secure portfolio.