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Gold – is it really a safe haven?

Nick Hyett, Equity Analyst, discusses the pros and cons of investing in gold.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Nicholas Hyett
Equity Analyst

Published on 19 August 2020

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Gold is often viewed as the quintessential safe haven. If inflation rips through the value of cash, or the entire global economy crashes, you still have your gold.

But while gold might be physically unchanged, the pounds and pence value of the yellow stuff is far less dependable.

Before its current strong run, gold reached a high of over $1,900 per ounce in 2011. By December 2015 the price had fallen by 44% to $1,051. Hardly a safe haven for investors that held on.

Chart showing the gold price ($/oz)

Past performance is not a guide to the future. Source: Lipper IM, 13/08/20.

Like any investment, you need to be prepared to weather rises and falls when investing in gold. However, unlike most other investments gold doesn't keep on working for you when the price is falling.

This article is not personal advice. If you're not sure if an investment is right for you, please speak to a financial adviser. All investments rise and fall in value, so you could get back less than you invest. Past performance is not a guide to the future.

Sentiment is king

When you invest in stocks and shares, you're investing in businesses which will hopefully generate profits, invest in growth and might even pay dividends. You've invested in what's sometimes called a ‘productive asset'. The price will rise and fall with investor sentiment and market conditions, but in most cases, the underlying businesses should keep ticking over and might even be growing.

The profits a company generates give an anchor for the share price. If the price gets too low relative to profits, usually seen in a very low PE ratio, buyers tend to come in and push the price back up.

Gold doesn't have this stabiliser. The price of gold is determined entirely by supply and demand. And since a large portion of demand is driven by investor sentiment – which can change quickly – it can be volatile.

Giving up on income

The other thing worth noting is that gold, unlike bonds, cash deposits and lots of stocks and shares, doesn't generate an income. Not only is income useful in and of itself, but it can also help to smooth investment returns over time. Giving you a little back every year helps limit the impact of price falls.

In contrast, returns from gold are driven entirely by price – or capital gains. That means investors have to buy or sell gold at the right time, a challenge even for the most experienced investors.

Investing in a gold miner however, could give you an income and mean you benefit from any increases in the price of gold. But remember that's not guaranteed and as with investing in any company, it comes with other risks.

What you need to know about investing in gold miners

So, what's the conclusion?

Gold shouldn't be looked at as a one-way bet, or even a safe haven. However, should inflation rise in the years to come, and there are plenty of reasons to think it might, it could be a good addition to a diversified portfolio.

Traditionally investors have been warned to keep commodities and other ‘alternative investments' to a small proportion of the overall portfolio – say 5%. That's probably still sensible. But if inflation starts to gather pace and bonds start to suffer then a larger allocation could come into its own.

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