Gold was the currency of states and countries across the world throughout history i.e. Byzantium used a gold standard over 1,500 years ago to support its empire and for centuries leading up to the 20th Century, it was the globe’s reserve currency.
Given its longevity, many people consider investing in gold as a “safe haven”, particularly during periods of stock market volatility. In the days following the 24th June 2016 Brexit referendum result, the FTSE 100 declined by 8% but the price of gold continued to rise, as it has done since April 2016.
Yet investing in gold, whilst it may sound glamorous and “safe”, comes with its advantages and disadvantages, which are important to be aware of before committing to this type of investment.
In this short guide, we will be sharing some of these benefits and drawbacks with you. Please note that this content is for information purposes only and should not be taken as financial/investment advice.
Pros: Why people turn to gold
Gold is tangible and “feels real” to us – similar to property. This (in addition to the prestige and attraction of jewellery) makes gold an appealing investment, compared to more intangible assets such as stocks and bonds.
As mentioned, gold can be a compelling choice for worried investors since its value is often not linked to other assets. During a decline in the stock or property markets, for instance, the value of gold might hold steady or even rise in value (since people often turn to it during market turbulence). Other advantages of investing in gold include:
● Liquidity. Property and gold are both “tangible” assets which you can see and touch. However, the advantage of the latter is that it can be bought and sold fairly quickly, which tends to be harder to achieve with property. Virtually anywhere across the globe, you can convert gold into cash with relative ease if you choose to do so.
● Diversification. Your investment portfolio should contain a range of asset types and classes in order to spread the risk. This might include a range of stocks, bonds, cash and property investments. Adding another asset type such as gold can help diversify your portfolio even further.
● Steady value. Over time, gold tends to retain its value due to the limited amount of gold available around the world. This can make it an attractive hedge within an investment portfolio, especially during times of rising inflation.
Cons: Reasons not to commit everything to gold
Gold offers lots of advantages to an investor but most Financial Planners would caution against leaning towards gold investments for the following reasons:
● Bubbles. We mentioned earlier that many people turn to gold during times of market volatility. This can cause the price of gold to rise, but if too many people rush to gold as a haven then it could lead the commodity to become overpriced. It’s then only a matter of time before a price correction happens, which could be harmful to your portfolio.
● Insurance & storage. You may choose to buy gold coins or bars yourself and you will obviously need a safe place to keep them. In all likelihood, you will also need to take out insurance. All this added expense erodes the value of your investment returns.
● Lack of income. When you invest in companies, it is possible to generate a “passive” income in the form of dividends. Similarly, when you invest in property such as a Buy to Let, you can also create an income stream via rent from your tenants. Gold, on the other hand, does not generate income (unless you buy shares in a gold producing company).
● Returns over time. If you are hoping to invest in an asset and hold it for 20 or 30 years in the hope that it will generate a long-term return, then gold is at a disadvantage compared to other assets. As mentioned earlier, gold tends to retain its core value over time whilst stocks/equities such as the FTSE 100, historically, have risen considerably in value. Whilst gold can be a useful hedge, it is not really a great wealth creator.
Ways to invest in gold
● Direct purchase. This is the “old fashioned way” of investing in gold – buying physical gold coins or bullion. You then hold and store these yourself, potentially to sell later.
● Gold company shares. You could buy shares in gold mining companies. The share prices will be strongly influenced by the price of gold as well as the success of the individual companies.
● Gold options/futures. It is possible to invest in gold via financial derivatives, using call and put options. This is quite a risky strategy, however, as most people try to “time the market” by purchasing a “put” when they anticipate a drop in the price of gold, or by buying a “call” if they think it will go up. This is very hard to predict accurately.
● Gold ETF. An exchange-traded fund (ETF) behaves a bit like individual stocks, trading on an exchange. A gold ETF will hold derivative contracts in gold, which are, themselves, backed by gold.
Final thoughts
Everyone’s financial situation and investment goals are different, so it’s unwise to make blanket recommendations regarding the position that gold should take within your investment portfolio. That said, it would be fair to say that, for most investors, gold is likely to occupy a small part of a wider investment strategy, if it is present at all.
