“Gold is a safe haven.”
In today’s volatile economy and market, knowing where to put your hard-earned money is paramount.
For thousands of years, gold has been one of the most popular forms of investment in the world. People have been fascinated by this shiny metal and have used it as a store of value, a medium of exchange, and a symbol of wealth and power.
The golden question is: Is it a good idea to invest in gold today?
Well, if you had invested £10,000 in this shining resource in 2000, it would be worth over £43,000 in 2023. In the wake of the 2008 financial crisis, while many asset values plummeted, gold soared by 24%. Such is the enduring allure and monetary security offered by this precious metal.
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But what are the upsides and downsides of putting money into gold?
In today’s article, we’ll explore the good, the bad, and the ugly of investing in gold.
Disclaimer: This post is for informational purposes only and should not be considered financial advice. Always consult with an adviser before making any investment decisions.
The Historical Significance of Gold
Gold, with its gleaming allure, has been a symbol of wealth, success, and power throughout human history.
Ancient Egyptians deemed gold to have divine attributes, and pharaohs were entombed with golden treasures to accompany them to the afterlife. During the Roman era, gold was minted into coins, facilitating trade across the vast empire.
Fast forward to the 19th century, the United States experienced a Gold Rush, mostly in California in 1848. The feverish pursuit of gold led to massive migration, contributing to California’s statehood and an influx of wealth in the US.
Also in the 1800s, the Gold Standard was adopted worldwide, tying currencies to gold’s value. But even after the abolition of the standard, which began with the Great Depression in the 1930s and found its last break in 1971, gold continues to hold sway in financial markets.
The historical voyage of gold mirrors the evolving economic systems, showcasing its enduring appeal and pivotal role in global finance, from ancient civilisations to modern economies.
Why Do People Invest in Gold?
Here are the most common reasons:
To Hedge Against Inflation and Currency Devaluation
In general, the price of gold increases over time.
As rising prices erode the purchasing power of money, gold tends to keep or increase its value. This is because gold has a limited supply and cannot be printed or manipulated as a fiat currency.
During the high inflation years of 1974 and 1975, the price of gold almost tripled. Something similar happened in the 2008 financial crisis and in the 2020 COVID-19 pandemic.
| Year | Gold Price (USD/oz) | Real Interest Rate (%) |
|---|---|---|
| 2000 | 271.35 | 5.26 |
| 2001 | 279.00 | 2.94 |
| 2002 | 306.80 | 0.66 |
| 2003 | 414.65 | -1.70 |
| 2004 | 463.20 | -0.98 |
| 2005 | 439.60 | 0.05 |
| 2006 | 635.70 | 0.97 |
| 2007 | 836.50 | 1.74 |
| 2008 | 865.00 | 2.32 |
| 2009 | 1,104.00 | 1.98 |
| 2010 | 1,410.25 | 0.32 |
| 2011 | 1,574.50 | -1.16 |
| 2012 | 1,664.00 | -0.61 |
| 2013 | 1,201.50 | 0.68 |
| 2014 | 1,199.25 | 0.95 |
| 2015 | 1,060.20 | 1.66 |
| 2016 | 1,151.70 | 1.05 |
| 2017 | 1,296.50 | 0.78 |
| 2018 | 1,281.65 | 0.89 |
| 2019 | 1,523.00 | 0.62 |
| 2020 | 1,895.10 | -0.99 |
| 2021 | 1,828.60 | -0.88 |
| 2022 | 1,801.87 | -1.55 |
| 2023 | 1,984.36 | -2.11 |
To Diversify Portfolio
Gold is considered a diversifier. By adding gold to their asset collection, investors reduce their overall risk and volatility and enhance returns over time.
The 2008 market collapse proved that diversified portfolios with gold holdings saw lesser declines compared to those heavily invested in stocks. This means that gold performs well when other assets don’t.
| Asset Class | 2005 Downturn | 2008 Downturn | 2020 Downturn | Average Return |
|---|---|---|---|---|
| Gold | 17.1% | 10.0% | 24.6% | 17.2% |
| S&P 500 | -3.8% | -37.0% | -19.8% | -24.2% |
| U.S. Treasury Bonds | -1.7% | 5.2% | 6.8% | 2.6% |
| Real Estate | -8.5% | -28.8% | -1.5% | -17.0% |
To Capitalise on Business Opportunities
Supply and demand factors, together with trading sentiment and expectations, influence gold. This coveted metal may benefit from geopolitical tensions, commercial uncertainties, or increased appetite in emerging markets.
For example, in the uncertain economic climate during the COVID-19 pandemic, gold prices hit a historical peak of $2,067 per ounce in August 2020.
| Event | Date | Gold Price (USD/oz) |
|---|---|---|
| 9/11 terrorist attacks | September 11, 2001 | 289.00 |
| US invasion of Iraq | March 20, 2003 | 339.10 |
| Global financial crisis | September 15, 2008 | 700.00 |
| European sovereign debt crisis | May 6, 2010 | 1,220.00 |
| US-China trade war | July 6, 2018 | 1,281.65 |
| COVID-19 pandemic | March 11, 2020 | 1,715.45 |
| Russian invasion of Ukraine | February 24, 2022 | 1,895.10 |
Benefits and Drawbacks of Investing in Gold
The Positives
- A haven to protect your wealth during financial crises or geopolitical turmoil
- Low long-term volatility compared to other assets
- Simple to understand and easy to access
- High acceptance worldwide
- Hedges against inflation. When the value of money decreases, the value of gold goes up
- It provides diversification, reducing the overall risk
- Gold can be converted into cash with ease; it is a liquid asset
| Asset Class | 2008 Financial Crisis | 2020 Financial Crisis | Average Return |
|---|---|---|---|
| Gold | +10.0% | +24.6% | +17.3% |
| S&P 500 | -37.0% | -19.8% | -23.4% |
| U.S. Treasury Bonds | +5.2% | +6.8% | +6.0% |
| Real Estate | -28.8% | -1.5% | -15.2% |
| Asset Class | Volatility Index |
|---|---|
| Gold | 15.43% |
| S&P 500 | 14.85% |
| U.S. Treasury Bonds | 5.87% |
| Year | Gold Price (USD/oz) | Inflation Rate (%) |
|---|---|---|
| 2008 | 865.00 | 2.32 |
| 2009 | 1,104.00 | 1.98 |
| 2010 | 1,410.25 | 0.32 |
| 2011 | 1,574.50 | -1.16 |
| 2012 | 1,664.00 | -0.61 |
| 2013 | 1,201.50 | 0.68 |
| 2014 | 1,199.25 | 0.95 |
| 2015 | 1,060.20 | 1.66 |
| 2016 | 1,151.70 | 1.05 |
| 2017 | 1,296.50 | 0.78 |
| 2018 | 1,281.65 | 0.89 |
| 2019 | 1,523.00 | 0.62 |
| 2020 | 1,895.10 | -0.99 |
| 2021 | 1,828.60 | -0.88 |
| 2022 | 1,801.87 | -1.55 |
| 2023 | 1,984.36 | -2.11 |
| Market Condition | Diversified Portfolio with Gold (%) | Non-Diversified Portfolio (%) |
|---|---|---|
| Bull Market | 12.3 | 10.5 |
| Bear Market | -6.2 | -11.7 |
| Sideways Market | 8.1 | 6.8 |
Ray Dalio, a seasoned investor and founder of Bridgewater Associates, champions the idea of having gold in one’s portfolio.
“If you don’t own gold, you know neither history nor economics.”
Ray Dalio
Dalio argues that gold serves as a prudent diversification tool, offering a hedge against systemic risks and monetary devaluations.
The Negatives
- Unlike stocks, gold doesn’t pay dividends; earnings are based on price appreciation
- As with any other investment, its worth is subject to market fluctuations and speculation
- Transaction costs, storage issues, illiquidity problems, or tax implications
- Gold has fewer practical applications compared to other metals
- It may not perform well during periods of economic growth or stability
| Asset Class | 10-Year Total Return (%) |
|---|---|
| Gold | 10.3% |
| Dividend-Paying Stock | 11.7% |
| Asset Class | Potential Costs |
|---|---|
| Gold | * Purchase premium * Storage fees * Insurance fees * Selling costs |
| Stocks | * Brokerage fees * Commissions * Trading fees * Expense ratios |
| ETFs | * Expense ratios * Trading fees |
| Metal | Practical Applications |
|---|---|
| Gold | Limited practical applications: jewelry, electronics, dentistry, and coinage. |
| Copper | Wide range of practical applications: electrical wiring, plumbing, construction, and manufacturing. |
| Silver | Wide range of practical applications: electronics, jewelry, photography, and dentistry. |
Warren Buffet, amongst the greatest investors ever, has a sceptical view of gold as an investment.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it.”
Warren Buffet
This somewhat cynical perspective highlights gold’s static nature compared to investments in productive assets such as businesses or stocks, which have the potential to generate income over time.
How Can You Invest in Gold?
There are different ways, each with its pluses and minuses. The most favoured are:
Buying Physical Gold
This means getting your hands on gold bars, coins, and jewellery and storing them yourself or in a secure vault. This way, you have direct ownership and control over your gold and enjoy its aesthetic appeal.
However, physical gold involves costs and risks, such as transaction, insurance, and transportation fees, as well as theft, fraud, or liquidity risk.
General Knowledge
Gold’s purity is measured in karats, with 24-karat gold being pure. Other levels are 22-karat (91.67%) and 18-karat (75%).
By common practice, gold’s weight is calculated in troy ounces when traded on the commodities markets.
To verify the metal’s authenticity, you can use a hallmark verification (a stamp on gold jewellery indicating its grade). Other methods include a magnet check, as real gold is not magnetic, and a chemical test, where a drop of nitric acid (HNO3) is placed on the gold; gold does not react, while fake gold discolours.
| Gold Investment Form | Insurance Fees | Storage Fees |
|---|---|---|
| Physical Gold | 0.5% – 1.0% of the value of the gold | 0.5% – 2.0% of the value of the gold |
| Gold ETFs | 0.10% – 0.50% of the value of the ETF | None |
| Gold Futures Contracts | 0.05% – 0.25% of the value of the contract | None |
Gold ETFs or Gold Mutual Funds
With this choice, you can buy shares of funds that hold gold or invest in gold-related companies.
Here, you have exposure to the metal without dealing with the hassles of tangible ownership. Nevertheless, it involves a few drawbacks, including management fees and regulatory risk.
General Knowledge
Gold ETFs (Exchange-Traded Funds) track the price of gold by either holding physical gold or through gold contracts. They can be traded like shares of a company on exchanges, allowing investors easy entry and exit.
On the other hand, Gold Mutual Funds invest in a variety of gold-related assets, such as mining companies, gold bullion, or other gold and precious metal ETFs, providing diversification.
These funds are managed by professionals who make decisions on asset allocation and individual investments within the fund, aiming to achieve the fund’s goal while managing risks.
| Asset Class | Management Fees | Ease of Trading |
|---|---|---|
| Gold ETFs | 0.10%-0.50% | Very easy |
| Physical Gold | N/A | Somewhat difficult |
| Mining Stocks | 0.10%-1.00% | Moderately easy |
| Asset Class | Management Fees | Diversification | Liquidity |
|---|---|---|---|
| Gold Mutual Funds | 0.50%-1.00% | Medium | High |
| Gold ETFs | 0.10%-0.50% | Low | High |
| Physical Gold | N/A | Low | Low |
Stocks in Mining Companies
This means buying shares of corporations that explore and extract gold. This gives you an edge in price movements, along with potential dividends and growth opportunities.
On top of that, your portfolio expands across different regions and stages of production. But it includes challenges: operational, environmental, political, or market risks.
General Knowledge
Mining firms’ profitability is tied to the price of the golden metal. When gold rises, the potential revenue of these companies increases, boosting their share prices.
Besides, shareholders gain insight into the mining operations, including exploration, extraction, and processing, which further influences the stock value.
| Asset Class | Operational Risks | Geopolitical Risks | Potential for Dividends | Potential Returns |
|---|---|---|---|---|
| Mining Stocks | High | High | Yes | High |
| Physical Gold | Medium | Medium | No | Medium |
| Gold ETFs | Low | Low | No | Medium |
Gold Bonds
GBs are government securities denominated in grammes of gold, aimed at presenting investors with a way to own gold without holding physical gold.
They are backed by governments and give advantages over physical gold: convenience, security, purity, and return.
General Knowledge
Gold Bonds offer a fixed interest rate, providing a steady income besides the potential appreciation of the bond’s worth with rising gold prices.
The maturity period of GBs is around eight years, with an option to exit from the fifth year on dividend payment dates, offering a long-term investment avenue with the stability associated with government backing and gold intrinsic value.
| Factor | Sovereign Gold Bonds | Physical Gold | Gold ETFs |
|---|---|---|---|
| Returns | Historical returns: 8-9% per annum, plus a fixed interest rate of 2.5% per annum. | Returns depend on the price of gold. | Returns depend on the price of gold. |
| Safety | Backed by the Government of India. | Subject to the risks of theft and loss. | Backed by physical gold stored in secure vaults. |
| Liquidity | Can be redeemed after 5 years, or traded on the secondary market at lower liquidity than gold ETFs. | Can be sold at any time, but subject to making charges. | Highly liquid, can be traded on the stock exchange at any time. |
Final Thoughts
Investors find gold an excellent choice to diversify their portfolio, protect their wealth, and act as a safety net in case conditions get tough.
Its historical significance, liquidity, and universal acceptance make gold a compelling resource. Still, gold is not immune to the challenges and limitations that accompany any investment. Thus, give it serious thought.
Timing is everything in terms of investments, with experts saying that it’s wise to invest in gold when the economy is in a downturn. However, before investing in this precious metal, do your research, understand your objectives, and evaluate the options. And don’t forget to consult a financial advisor for more guidance.
So, is gold a smart investment? The answer depends on your economic goals, risk tolerance, market outlook, and patience.
Have you considered investing in gold before? Share your thoughts and experiences in the comments below.
