Money Talks with Jim Cramer

Jim Cramer: Make this smart investment in times of inflation and 'economic chaos'

Why Jim Cramer invests in gold amid rising inflation
Why Jim Cramer invests in gold amid rising inflation

As an investment, gold won't offer the same returns as stocks, but it can offer some relief from rising inflation, says Jim Cramer, host of CNBC's "Mad Money" and Investing Club.

"I believe in gold," Cramer tells CNBC Make It. He argues that it is one of three things that "holds its value in a recession." The other two: masterwork paintings and incredible mansions.

Gold's value is derived from its scarcity as a commodity, as well as its long history as a stable medium of exchange. The price of gold tends to rise during economic uncertainty and when inflation is high.

The current year-over-year rate of inflation is 8.6%, which is well above the Federal Reserve's benchmark target rate of 2%. To try and reduce inflation, the central bank has raised interest rates, making it more expensive to borrow money. 

Because of this, many investors are skittish about a possible recession. As of Monday afternoon, the S&P 500 index officially entered a bear market, and is currently down more than 20% since the beginning of the year.

This is why gold can be a safe-haven investment: The returns on gold versus stock tend to be inversely proportional, which means that when stock prices fall, gold prices tend to rise.

For those interested in owning gold, like Cramer, he offers three options.

The first is the VanEck Vectors Gold Miners ETF, known as the GDX, a security that tracks the overall performance of gold mining companies. It's one of the the more liquid ways to own gold, which means it's relatively easy to sell, compared to other options.

The second is through other gold-related ETFs, including those known as either senior or junior funds. Junior funds are more speculative, as they track smaller mining companies with growth potential. Senior funds are comparatively safer, since they include mature mining companies that generate consistent revenue from their mines. "I own a senior gold fund," says Cramer.

Lastly, you can own physical gold. However, it isn't a very liquid investment: "It's not like you can sell a gold coin easily through a brokerage account," Cramer said on "Mad Money" in 2019.

The other problem is that physical gold is easily stolen. For that reason, you'd want to pay for additional storage and security, like a safety deposit box. However, aside from the costs of storage, physical gold can be a cheap way to own gold, Cramer tells Make It.

Cramer has always recommended owning a bit of gold "as insurance against the unknown," as he said in 2019. Within his personal portfolio, 5% is typically put aside for gold-related investments.

There are no guarantees that the value of gold will rise, however. And stocks and bonds are generally considered better retirement investments since they've historically outperformed the price increase of gold in the long-run. But gold can be a safe investment when the economic outlook isn't great, Cramer says.

As he said on "Mad Money" in late 2020, buy gold "if you want some insurance against inflation or just general economic chaos."

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Jim Cramer on why you shouldn't stop investing during a recession
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