Investing in gold

Gold has always had a firm grip on our imagination. The mythical city of El Dorado, the legend of King Midas and of course the dulcet tones of Spandau Ballet. For many it is the symbol of success with celebrities flaunting their gold bars, necklaces and even, in Elvis’s case, a toilet. Could gold leave investors similarly flush with wealth? We explain all.

Written by David Craik

Published on 29 Apr 20225 minute read

Gold is traditionally seen as a ‘safe haven’ for investors to run to at the first hint of economic or social trouble.

From Brexit to the pandemic and now war in Europe, we haven’t exactly been starved of worry over the past few years and the value of gold has rocketed. According to The Royal Mint, its price per ounce climbed 62% to £1,523 between August 2018 and mid-April 2022. That’s compared to a 56% hike in the S&P 500 equity market in the US over the same period [1]. Indeed, The Royal Mint states that if someone invested £1,000 in gold five years ago, it would be worth around £2,000 today [2].

But, as with all investments such as equities and bonds, there are periods of volatility. For example, the gold price dropped 20% between August 2020 in the height of the pandemic to the spring of 2021 when the vaccination roll-out was well underway [3].

As with all investments, timing and understanding of the asset is crucial.

The allure of gold

According to some historians the first gold coin was minted by the ever-modest ruler of the Persian Empire ‘Darius the Great’ around 500BC. Since then, gold has continued to enthral, excite, and enrich people across the centuries.

It proved so valuable that in the 1800s a Gold Standard monetary system was created to which all other currencies were adjusted. It lasted until the First World War only to reappear and then disappear again in the Great Depression of the 1930s.

It made a glittering comeback after the Second World War linked to the US dollar but once again departed the global stage in 1971. However, its investment value lives on.

What are the benefits of gold investing?

Wealth preservation – as we’ve seen with the course of the gold price over the last four years – despite some wobbles – the main direction is upwards. In short, if you are a long-term investor then it is certainly one to consider
Inflation hedge – gold tends to be in demand during times of higher inflation as investors believe it holds its value better than the pounds and pennies in your pocket. That is partly down to gold’s rarity value compared with easily printed paper money
A perceived safe haven – history has shown that currencies may disappear, and paper fortunes collapse in times of great political, social, or economic upheaval. But the hard, physical, shiny gold bar which you can hide down your trouser leg or store away in an underground vault should retain its value until calmness returns
Diversifier – given its position as an inflation hedge and one which investors turn to in times of trouble, gold can play an important part in diversifying your portfolio. So, when the tough times hit and your shares head south, the bling can bring you some comfort

What can take the shine off gold investing?

Higher interest rates – if a central bank looks to control inflation by hiking interest rates, then this could have a detrimental impact on the gold price.

Price volatility – the gold price is typically highly volatile, as high, or even higher than equities. If you like the easy life, then the ups and downs may not be for you
Unhappy haven – when equity markets are soaring then there is less demand for gold and its price will suffer
Stronger US dollar – if the value of the US dollar is high then this can affect demand for gold as it is valued predominantly in this currency
Mining mania – gold is a commodity and like any other metal over or under-production can impact its price
Income free – unlike equities with their dividend payments and the cash in your bank gaining interest, gold does not provide an income. Its main benefit is its appreciation in value. Because it is a physical asset it can also be costly to store gold coins or bars

How do I invest in gold?

Physical – you can buy your own gold bars – or bullion as it is known – from dealers, individuals and online. But you need expert advice to help you, somewhere safe to put it away from the kids who think there is chocolate underneath the gold ‘wrapper’ and insurance. Gold coins or jewellery could be another option
Stocks and shares – you could invest directly into gold producers by buying shares. An advantage is that as well as a return when you sell – gold fingers crossed – you could earn some dividend income along the way. However, as with all single stocks the price can be volatile and one mine failure here and a miners strike there could leave you out of pocket. Investors also need to be aware that gold shares don’t directly reflect the gold price and are more correlated with the movement of equity markets. As such they don’t give the same diversification benefits as investing in physical gold
Funds, ETFs, ETCs – you could invest in a fund or ETF (exchange-traded fund) which tracks the performance of gold mining stocks or in an ETC (exchange-traded commodity) which tracks the gold price itself

Should I invest in gold?

So, should you invest in gold? Well, who are we to argue with our friend Darius the Great, Elvis Presley and generations of darts players rattling up to the oche in their gold bracelets?

We wouldn’t put all our savings into it, but a small allocation of gold could be just the ticket to further diversify your portfolio.

Important information

This article is solely for information purposes and is not intended to be, and should not be construed as investment advice. Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The opinions expressed are made in good faith, but are subject to change without notice.

You should always remember that the value of investments can go down as well as up and you can get back less than you originally invested. Past performance is not an indication of future performance.