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Investing in gold – a beauty to behold?

What to think about when investing in gold and what could be on the horizon for investors in the shiny stuff.

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.

They say beauty is in the eye of the beholder.

Much the same could be said of the value of gold. I’m not talking jewellery here, but gold as an asset class.

Valuing gold

In recent times the gold price has been performing pretty much as we’d expect. It’s been rising as real interest rates (interest rates minus inflation) fall.

However, gold is supposed to react to difficult political and economic times too. Unlike currencies, you can’t print infinitely more gold, and there’s only a small supply of it. This had led some people to argue it’s a store of real value and its value is constant regardless of inflation.

My point is that all sorts of theories and conspiracies surround gold. Valuing gold is difficult and that makes it difficult to talk about and can make it confusing for investors.

How's gold done?

Gold generally hasn’t been a great investment. The price has spiked now and again, but not since the late 70s and early 80s has it really shone.

I’ve been a fan this year, as I see investors fretting about falling bond yields causing increased inflation. The thought behind this is that central bank lockdown-related-largesse will unleash inflationary pressures as demand outstrips supply – pushing prices up.

When gold recently topped $2,000 we saw a flurry of media stories on it. That has in the past been a sign of some profit taking to follow. And that’s exactly what happened in this case – with the gold price falling back to $1,930 a few days later.

Short-term caution

I believe gold has the potential to rise further as Covid-19 acts as a catalyst for change. Having said that, I don’t believe investors should become carried away with it over the shorter-term.


Because I see deflation as the real threat to the economy in the next six months to a year, rather than high inflation.

Covid-19 has exaggerated existing themes in the global economy, both good and bad. Big secular forces include ageing populations (people in retirement spend less), technology (which bears down on costs through better service and transparency) and finally a world which has huge amounts of debt (making growth harder).

This will be reinforced as Covid-19 has shut down huge swathes of the global economy, causing huge rises in unemployment and bankruptcies. The result will likely be a significant fall in demand later this year and into 2021. That could cause markets and prices to fall, and I don’t think the gold price will be immune.

Yet ironically, I think this is also sowing the seeds of future inflation.

Inflation to come

Central Banks have massively increased their balance sheets to try and stave off the crisis. Governments too will be spending vast amounts on infrastructure to keep economies moving forward and supply employment.

All that would drive a big pickup in inflation.

Higher inflation means higher interest rates, but I think interest rates will be below the prevailing rate of inflation. This is known as financial repression. Those with cash and on fixed incomes will be especially vulnerable. It is at this stage I think gold could really take off as investors rush to protect the real value of their savings.

It will take time for these things to develop, so I’m thinking maybe we start to see the big up in 2022 and then it gradually goes higher into this decade.

What could go wrong with this view?


Macro forecasting and timing is hard because so many other factors can disrupt what you expect. But the biggest danger for investors is to presume the past prevails into the future.

In the 1980s and 90s no-one believed interest rates would be where they are now. More recently gold has been largely written off because it’s been a poor performer over most investors’ lifetimes.

I think the times are changing. This decade will look very different to the last four. We all need to be more alive to the challenges, but in due course I think gold could be one of the beneficiaries, though of course there are no guarantees.

All that is gold need not glitter

Nicholas Hyett, Equity Analyst

Gold is viewed by many 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 metal 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.

Gold price $/oz

Past performance is not a guide to the future. Source: Lipper IM, 31/08/2020.

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.

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 hopefully grow.

The profits a company generates can give an anchor for the share price. If the price gets too low relative to profits, usually seen in a very low price-to-earnings ratio, buyers have tended to come in and help 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 most 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.

Because gold doesn’t yield anything, a low interest rate is often seen as good news. Interest on cash can be thought of as the ‘opportunity cost’ of holding physical gold – it’s the income you give up by holding gold rather than cash. At the moment the opportunity cost is virtually zero. However, if interest rates rise in the future, though we might be some way off, that’s bad news for the shiny stuff.

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.

So, what's the answer?

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 over the next couple of years and bonds start to suffer then a larger allocation could come into its own – although there are no guarantees.

Read more

Explore our Investment Times October 2020 edition for more articles like this.

See all articles

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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.

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