The gold(en) opportunity: is investing in gold a wise decision?

After three years of Covid-19, high, sticky inflation levels, and ongoing effects of the Russia-Ukraine war, global economic conditions have experienced a series of ups and downs. These are some of the major contributing factors that have underscored the importance of prudent investment decisions. Because of this, investors have been emphasising and searching for secure investment opportunities amidst the ever-changing economic landscape. But the question which remains to be answered is whether the golden metal has proven, yet again, to be the steadfast asset that has stood the test of time.

Advantages of investing in gold

‘Safe haven’ investment

Gold has traditionally served as a haven during times of economic uncertainty. Its value often rises when other asset classes experience volatility, making it a usually reliable hedge against inflation and currency fluctuations.

For instance, during the Great Recession around 2008, when stock markets were crashing and firms were shutting down under extreme financial pressures, gold acted as a protection against systemic risk. Gold grew by more than 100% between 2006 and 2009 as the graph below indicates.

Diversification

A lot of investors believe that including gold in an investment portfolio can enhance diversification and reduce unsystematic risk. Investing in a span of financial instruments ensures you don’t put all your eggs in one basket. Other investments that tend to share a relationship with the trajectory of equities, such as energy markets, could defeat the idea of diversification when added to a portfolio with assets that typically function in the same way.

Acting as the outcast among some positively correlated investments, gold has historically observed a negative correlation with global equities. This means when the stock market is up, gold prices usually fall, and vice versa. Incorporating gold in investment portfolios, therefore, could serve the purpose of helping to reduce overall portfolio risk.

Preserving wealth

Over the past 50 years, when consumer prices showed an increase of 5% or more, gold prices gained over 20% on average, showcasing its outperformance of inflation. The chart below exhibits the strong positive relationship seen throughout the last 25 years – it shows how gold rallies when inflation rises, making a lot of investors believe it’s a typically reliable hedge against inflation.

Disadvantages of investing in gold

Storage and security

Owning physical gold requires storage arrangements, such as secure vaults or safe deposit boxes, which may involve additional costs like insurance coverage and fees contributing to deflation over time. For instance, the Royal Mint charges 2% plus value-added tax (VAT) per annum on the average market value of the holding as storage costs for gold bars and single coin capsules.

Lack of income generation

Unlike shares or bonds that may provide dividends or interest payments, gold doesn’t generate a passive income. When interest rates are low, the opportunity cost of holding gold diminishes, making gold more appealing to investors. Conversely, when interest rates rise, gold may face temporary headwinds due to the potential attractiveness of alternative investments.

The alternatives to holding wealth in gold are in saving accounts or in low-risk bonds, which can help investors earn interest. Therefore, when interest rates rise, yields on savings accounts and bonds also rise, which makes gold a less attractive investment.

Price volatility

Gold prices can be subject to short-term fluctuations, influenced by factors such as economic indicators, central bank policies, and geopolitical events. Prices for gold and silver are extremely susceptible to unexpected shifts in the financial system and the world economy.

How to invest in gold

Investing in gold offers flexibility, allowing individuals to choose the method that best suits their preferences and financial goals. The most common ways to invest in gold include:

Physical gold

Owning physical gold in the form of bars, coins, or jewellery is a tangible and reassuring investment. Bullion dealers and reputable banks provide avenues to purchase and store gold securely.

Exchange traded funds (ETFs) are an accessible and convenient way to invest in gold without the physical possession element. These funds track the price of gold and can be bought and sold on stock exchanges. Some of the top gold ETFs we offer include:

• The Royal Mint Responsibly Sourced Physical Gold ETC
• Sprott Gold Miners ETF
• iShares Physical Gold ETC

Explore our introduction to gold ETFs

Gold CFDs (contracts for difference)

With CFDs, you can trade on the price of gold without owning the commodity directly. CFDs enable you to go long or short on gold price movements. With us, you can open a position on the price of spot gold CFDs.

Note that CFD trading isn’t suitable for everyone as these are complex derivative instruments that use leverage, which may result in losses that exceed your initial deposit. Leverage enables you to open a position while paying only a deposit. You’ll get full exposure, but both potential profits and losses will be magnified to the total value of the trade.

Gold futures and options

These financial derivatives offer you the opportunity to trade on the future price of gold without owning the physical metal. You can trade gold futures and options with CFDs on our leveraged trading platforms, equipping you to take full advantage of trading gold online.

Gold miner shares

These companies explore gold resources, develop mines, and sell this and other metals. Some gold shares that are available to purchase on our share dealing platform are Barrick Gold Corp and Franco-Nevada Corp. The graph below represents how gold mining shares can sometimes have the potential to outperform alongside rising gold prices. While they’re much more volatile than gold bullion, investors can aim for significant returns in gold bull markets.

Demand and price dynamics of gold

Strong global demand

The strength of demand for gold is typically consistent across various sectors, including jewellery, technology and central banks. In 2021, global gold demand reached 3,759.6 tonnes, with jewellery accounting for approximately 39% of the total demand. The steady and widespread demand for gold contributes to its enduring value.

Limited supply

Unlike fiat currencies that can be printed at will, the supply of gold is limited. The production of gold is constrained by the availability of mines and the costs associated with extraction. This scarcity factor enhances the appeal of gold as a valuable and finite resource.

Price appreciation

As seen in the gold shares vs gold bullion graph, over the long term, gold has demonstrated an impressive track record of price appreciation. Between 2000 and 2022, the price of gold increased by approximately 685% in comparison to the S&P 500’s 180% increase and the FTSE 100 with about 22% – showcasing its potential for substantial returns on investment.

Central bank reserves

Central banks worldwide maintain significant gold reserves as a form of financial security. These institutions view gold as a reliable store of value and a means to diversify their foreign exchange holdings. The consistent demand from central banks further solidifies gold's status as a trusted financial asset.

From its considerable price appreciation over the years to its renowned scarcity across the world, the yellow metal has paved its way from only being traded physically to also adopting digital forms, making it simpler for traders and investors to reap its benefits each day.

With us, you can take a position on the price movement of gold via CFDs, or hold shares via a commodity ETF or a listed company to help diversify your portfolio. If it ticks all your boxes, why not take that golden opportunity?