Investing in gold – should you hold the shiny stuff?

Gold was one of the first metals ever discovered and one of the earliest forms of money.

It’s scarce. All the mined gold in the world would make a cube of sides little more than 20 metres – enough to fill about three Olympic swimming pools. Supply has been fairly steady over the last few years, with gold mining adding about 1% to this stock every year.

It’s tangible and portable. It’s been traded across continents for centuries. Its high price means that the cost of refining, minting, transporting, storing, securing and insuring the metal is modest relative to how much it’s worth.

It’s no-one else’s liability. This means there’s no need to assess the creditworthiness of the issuer, unlike any share or bond.

The gold market is also global and is highly liquid – that means it’s easy to buy and sell.

Gold is mainly used for jewellery, investments and central bank reserves. The metal has some industrial uses, but the percentage used is much lower than for any other precious metal.

The precious metal has also maintained its purchasing power over long periods of time. This enduring value is illustrated by the fact that just six gold coins were, between them, in use continuously for two millenniums. The Roman aureus, Roman solidus, Byzantine nomisma, Islamic dinar, Venetian ducat and British sovereign were accepted at home and internationally. By contrast, over 6,000 cryptocurrencies were created between 2021 and 2022 alone.

Why invest in gold?

People buy gold for two reasons and that’s remained unchanged over history.

Firstly, for its beauty – as a symbol of love, or a display of wealth and power. And secondly, for the safety it offers – its ability to sustain purchasing power through the toughest of times.

The price of gold moves relatively independently from shares and bonds, meaning it can offer some shelter when shares and bonds fall in tandem. That’s why gold has typically performed well in times of economic or political crisis. It’s offered some shelter against big debt crises in the past. And the price has typically risen when geopolitical risks have increased although past performance should not be seen as a guide to the future.

All that is gold need not glitter though – there are some drawbacks of the shiny stuff.

Gold is a volatile asset – day-to-day and year-to-year. Even over a decade, its price can move very differently from the rate of inflation.

It doesn’t offer investors any income, unlike bonds and some shares. It also offers no prospect for intrinsic growth, unlike a lot of shares. That means returns from gold are driven entirely by price – or capital gains. Investors have to buy or sell gold at the right time, a challenge even for the most experienced investors.

While you might be able to expect the price to match inflation over the very long term, it’s a poor hedge against inflation over shorter periods. That’s why some investors choose to leave it out of their investments altogether.

Gold price performance 1973 to present (£)

Past performance isn’t a guide to the future. Source: Lipper IM, to 28/02/2023.

While gold might be physically unchanged, the pounds and pence value of the yellow metal is far less dependable.

Investors would’ve seen the value of their holding go up by ten times between 1973 and 1983. But, after peaking, it took over 23 years to get back to its 1983 high.

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.

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.

Should you hold gold?

Gold shouldn’t be looked at as a one-way bet, or even a ‘safe haven’. If you buy gold to get rich, you might succeed, or you could well be disappointed. If you buy gold to stay rich, you can expect to maintain the purchasing power of your investment over the very long term. And you could be thankful you did if a crisis comes along.

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.

This article isn’t personal advice. If you’re not sure what’s right for you, please ask for financial advice. Investments and any income from them can rise and fall in value, so you could get back less than you invest.