The gold spot price hit a new high on Oct. 30, 2024, roughly one year after club store Costco began selling gold bars on its website. Both events generated headlines and broader interest in gold as an investment.

Novice to experienced investors may have a use for gold in their portfolios, but there is a caveat. Gold does not behave like cash, stocks, or bonds, so some learning may be required to use it appropriately. Let's explore what you need to know by explaining the gold investing process in four steps.

Read more: What to know before buying gold, silver, or platinum from Costco

Step 1: Set your goal

Gold's headlining characteristic is its ability to hold its value, or even appreciate when other assets are falling. Investors often use this behavior as a stabilizer. They rely on gold's strength in tenuous climates to limit unrealized losses in equities and inflation-related reductions in purchasing power of cash deposits.

Gold is also a widely recognized store of value. As such, the precious metal can potentially stand in as a medium of exchange if the dollar collapses. In this respect, "gold is an insurance policy" against economic calamity, according to Scott Travers, author of "The Coin Collector's Survival Manual" and editor of "COINage" magazine.

Learn more: How to start investing in 2024: A step-by-step guide

Given gold's historic behavior, three suitable investing goals for a gold position are:

1. Diversification into an asset that moves independently from stock prices

2. Protection against inflation-related loss of purchase power

3. Backup source of value and wealth in an unlikely economic collapse

Step 2: Set an allocation

Allocation is the composition of your portfolio across different types of assets, such as stocks, bonds, and gold. Setting a target allocation for each asset type helps you control risk over the long term. This is because asset values change over time. Stocks appreciate, for example. Unless you periodically rebalance your holdings to restore the target allocation, the appreciation can leave you over-concentrated in equities.

Travers recommends holding 5% to 15% of your net worth in gold. Other experts advise going as high as 20% if you are risk-tolerant. A review of gold's historic behavior in light of your risk appetite should help you identify the right allocation percentage.

Learn more: Track gold’s spot price and read additional insights

Historic behavior of gold

Historically, gold has shown extended upcycles and downcycles. The precious metal was in a growth phase from 2009 to 2011. It then trended down, failing to set a new high for nine years.

In those lackluster years for gold, your position will dilute your overall investment returns. If that feels problematic, a lower allocation percentage is more appropriate. On the other hand, you may be willing to accept gold's underperforming years so you can benefit more in the good years. In this case, you can target a higher percentage.

As of late, the precious metal has been strong. Analysts at Goldman Sachs and JPMorgan believe the trend will continue at least in the short term. Relevant factors include an uptick in central bank purchases worldwide, falling interest rates, and geopolitical events such as rising tariffs.

Yahoo Finance news: Gold jumps to 1-week high as Russia-Ukraine war escalates

Count your jewelry

Remember, too, that your target allocation includes the value of the gold you already own. Travers recommends checking your jewelry box before buying more gold. Given gold's sharp rise in value this year, your gold jewelry may be worth more than you think. Travers warns against selling your jewelry to buy gold coins because you will pay dealer fees on both transactions.

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Step 3: Choose a form

Once you define your target gold allocation, you must choose a form of gold to hold. Three options are physical gold, gold mining stocks, and gold ETFs.

Physical gold

Physical gold includes jewelry, gold bars, and gold coins. The advantages of physical gold include:

1. Peace of mind. If you keep your physical gold at home, it is available for you to use as a medium of exchange in an economic emergency.

2. No added volatility or ongoing fees. Gold mining stocks 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.

Learn more: Take a deeper dive into the gold sector

The disadvantages of physical gold include:

1. Risk of theft or loss. Physical gold must be properly secured. Whether you store it in your home or with a depository, gold can be stolen. In October 2024, a federal jury found Robert Leroy Higgins guilty of fraud charges after $50 million worth of precious metal disappeared from his business, First State Depository.

2. Lower liquidity. Physical gold is less liquid than stocks or ETFs. If you are not using the gold as a medium of exchange, you may need to locate a dealer and pay a markup on the sale.

Gold mining stocks

Owning shares in gold mining stocks provides indirect gold exposure. The advantages of mining stocks over physical gold include:

1. Greater liquidity. Large-cap gold mining stocks like Barrick Gold Corporation (GOLD) and Franco-Nevada Corporation (FNV) generally enjoy a narrow bid-ask spread, which is a sign of liquidity. The bid-ask spread is the difference between what buyers will pay and what sellers will accept.

2. Easy to store. Stocks live in your brokerage account and do not consume physical space. In normal times, this is an advantage. In an economic catastrophe, this could be a disadvantage if brokers or the stock market are temporarily shut down.

The disadvantages of gold mining stocks include:

1. Greater volatility. Since 2000, gold mining stocks have risen and fallen faster than gold spot prices. And in recent years, gold mining stocks have trended down even as gold has gained value.

2. No utility as a medium of exchange. Gold mining stocks can appreciate, but they have no direct utility as a medium of exchange.

Gold ETFs

Gold ETFs are funds that invest in gold mining stocks or physical gold. Their advantages include:

1. Easy to store. Like gold mining stocks, ETF shares are essentially digital assets with no storage requirements.

2. Greater liquidity. Shares of the most popular gold ETFs, like SPDR Gold Shares (GLD), are heavily traded which implies good liquidity.

3. Tied directly to gold prices. ETFs backed by physical gold can be less volatile than gold mining stocks or gold mining ETFs.

Two disadvantages of gold-backed ETFs over physical gold are:

1. Fund fees. Funds charge fees, which dilute returns over time. For context, the expense ratio of SPDR Gold Shares is 0.40%. This translates to $4 in fees annually for every $1,000 invested.

2. No utility as a medium of exchange. As with gold mining stocks, you probably cannot use ETF shares to trade for food in an economic emergency.

Step 4: Consider your investment timeline

After selecting the size and form of your gold investment, consider your investment timeline as a final suitability check. Gold can be volatile. It has also demonstrated extended periods of decline. Those behaviors are not acceptable if your timeline is short. The risk is too great that gold's price will be down when you need to liquidate.

An extended holding period also provides greater potential for reaching your goals. As an example, hedging against stock market declines or inflation is a long-term effort. These outcomes will continue to be risks as long as you own stocks or cash deposits. Holding gold as insurance against an economic calamity requires you to keep the asset until you need it.

Gold as a safety net

A small gold position can act as a stabilizer for your stock portfolio and your purchasing power. If you choose physical gold stored at home, it can also stand in as currency in the worst of economic crises. Just know that gold has underperformed stocks in the past, so choose your target allocation accordingly.