Can you lose by investing in gold?

Before investing, it's important to understand how gold works. As with any investment, you run the risk of losing, and that risk is magnified if you don't know the facts. Since gold is an alternative commodity, it helps diversify your investment portfolio and, in doing so, provides a solid hedge against inflation. Gold interest rates tend to remain unchanged by inflation because they retain their value longer than other investments backed by dollars.

You can also invest in gold by purchasing gold mining stocks, gold futures contracts, and gold exchange-traded funds (ETFs). Over the years, it has served as a hedge against inflation and the erosion of major currencies and is therefore an investment worth considering. The key to diversification is to find investments that are not closely correlated with one another; historically, gold has been negatively correlated with stocks and other financial instruments. Depending on your investment strategy, experience, and the level of risk you're willing to take, you can invest in any of the following options.

The truth always lies somewhere in between, and in this case, the truth is based on a multitude of factors that cover your investment objectives, your time horizon and, ultimately, your investment strategy. Since you don't own gold when you use a gold derivative, it may be a more effective opportunity for short-term trading than for long-term investing. And in fact, during financial calamities when investors flee the stock market, gold prices tend to rise. This feature of futures trading allows you to lose more than the initial amount of your investment even before the contract settlement date and makes trading futures too dangerous for most novice investors.

While you probably want to buy ETFs that actually hold physical gold, there are funds that invest in companies in the gold industry, often gold mining stocks or gold streaming companies that offer funding to gold miners. Instead of investing in a mutual fund, you can also buy shares of gold mining companies (often referred to as gold stocks) directly. While this value may change, one of the main reasons investors seek gold is because physical gold is easy to liquidate. 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.

For the past 50 years, investors have seen gold prices soar and the stock market crash during years of high inflation. Every gold coin has two sides. Investing in gold is a lucrative idea, and investing in gold is a losing idea, and then there's the truth. Other investors may want to diversify their portfolios by buying a gold ETF, for example, that is backed by physical gold, but that doesn't require investors to store gold ingots themselves.

Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce overall volatility and risk.