Should you invest in gold?

The fascination and appeal of gold has stood for millennia. For much of human history it has been used as a means of exchange, a store of value and a recognisable display of wealth and power. But gold has a special allure for many investors too. It tends to maintain its spending power over time, can become the go-to asset in times of crisis, and represents an ‘independent’ currency that cannot be debased.

Why buy gold?

Gold can act as a safe haven asset, a financial teddy bear investors cling to in times of crisis. When the world seems uncertain, its timeless and immutable nature has greater appeal. That’s because gold has a special status as an important hedge against inflation, a historic store of value and an ‘independent’ currency that cannot be debased.

Paper currencies lose their value over time as more money is created. Yet the supply of gold and other precious metals is strictly limited, and expensive investment is necessary to discover and extract more. They can therefore act as a diversifier for those with broad portfolios who want to add something different that isn’t necessarily correlated to the prices of other assets.

What is driving the gold price now?

Gold has performed remarkably well in 2024 to date, rising by over 20%. The explanation lies in ongoing central bank buying, strong investment flows out of Asia and resilient consumer demand. There is also a favourable backdrop of falling interest rates across most major economies.

Although gold is seen as a form of protection for investors it competes with other assets. When interest rates are high and rising, some investors are minded to sell gold – which pays no interest – and buy assets that do. At these times higher yields available in bonds, property or even shares might represent more appealing options, as do higher interest rates on cash. However, as investors anticipate interest rate falls there tends to be a better environment for bullion.

More important recently is that demand has ramped up. Central banks, investors, and households in the East have recently emerged as heavy buyers of gold, notably in China as the end of the property bull market has triggered a major change in attitude towards it. The renewed popularity is linked to the trend of deglobalisation and heightened geopolitical tensions as central banks increasingly crave a non-politicised reserve asset. As the world continues to fragment, this trend could continue.

There are also concerns of a more inflationary environment, especially if Donald Trump wins the US election. His policies of reshoring and tariffs could stoke price rises in the world’s most important economy, and this has driven some investors to increasingly prize monetary safe havens.

Finally, gold also tends to struggle when the US dollar is strong and benefit when it weakens. Bullion is priced in the US currency and a buoyant greenback tends to dampen buyers’ enthusiasm, especially in emerging markets where there is significant jewellery consumption. The dollar has been on the back foot in currency markets in recent months as investors increasingly price in a sharper trajectory of interest rate cuts from the US Federal Reserve.

What are the disadvantages of gold?

Longer term, the prospect of interest rates falling further as inflation comes into line, continued strong central bank buying and the potential for greater geopolitical instability could be positive factors for the gold price. This makes it a useful diversifier in a world where many financial assets are correlated – i.e. they have a tendency to move up and down with one another. However, gold is still vulnerable to the increasing competitiveness of returns on other financial assets, especially if interest rates remain higher than currently supposed.

In the short term gold can also be highly volatile and unpredictable, which is why it is appropriate to hold only a modest amount in portfolios. Gold is a store of value rather than a productive asset, so it is generally regarded as less appealing during periods of stability and growth, particularly when interest rates look set to rise because it generates no income.

Gold is an inflation hedge in the long term but not the short term. Other factors such as sentiment play a much bigger role month to month or year to year, but the consequent moves can look like blips when you zoom out to a multi decade timescale. Investors buying gold for an inflation hedge for short periods are therefore often left disappointed by its capricious nature.

On balance, it’s worth considering bit of exposure to gold as a ‘real’ asset with wealth preservation characteristics, but bear in mind it can be a frustrating asset to own with extended periods in the wilderness.

Options for buying gold

Some gold investors like to buy coins or bars, but this is unlikely to be a viable option for most people due to storage and insurance requirements. Fortunately, there are convenient ways to add gold to a portfolio such as an exchange traded product.

• We tend to prefer ‘physically-backed’ ETCs (exchange traded commodities) which own gold kept securely in a vault, as opposed to derivatives-based funds where there can be some added risk and complexity. One example is iShares Physical Gold, which is part of the Charles Stanley Direct Preferred List our curated list of investments for new investment in their respective sectors.
• A higher risk route into gold is through shares in gold mining companies. These tend to represent a ‘geared’ play on the gold price, meaning they multiply the effect of a rise – but also multiply any fall. This is because profits can be highly sensitive to what the gold price is doing, and the riskier firms could even swing from profit to loss or vice versa on these moves.
• The fund on our Preferred List specialising in this adventurous area is Blackrock Gold & General. Managed by the well-regarded Blackrock's Natural Resources Team, it invests in gold and other precious metal-related companies on a worldwide basis. The fund holds between 50 to 80 companies, the vast majority of which are established producers of gold, with exposure to pure exploration stocks (typically the riskiest in the area) relatively low compared with some of its peers.

Read more: Five tips for investing in gold, silver and other commodities