Going for gold: Is gold a good investment?

Low-interest rates and market volatility in the early months of the coronavirus pandemic caused gold to enter a bull market. Last year, it rose from a little over £36 a gram to more than £45. Depending on how financial markets behave, some people believe we could see gold hit new highs during the coming months.

Societies and economies have valued gold throughout the centuries. A sign of power and wealth, and people continue to hold it for various reasons today.

Gold is the precious metal we turn to when other currencies don’t work. For many, it acts as insurance against hard times.

But does this mean it’s a good idea to buy gold? And, the bigger question is, should investors who take an evidence-based approach to their portfolio consider buying it at all?

Is gold a valuable asset to hold?

It’s no secret that gold has a rich history and is thought to be valuable. Coins containing gold first appeared around 550BC, and pure gold coins were struck 100 years later. And treasures containing gold date back as early as 4000BC.

Gold gained its foothold in contemporary finance in the late 1800s, when many nations adopted the gold standard and fixed the value of their currency to the price of gold. Many countries dropped and readopted the gold standard until 1971, when it was replaced by free-floating fiat currencies.

Gold loves a crisis

In the years following the 2008 financial crisis, the price of gold rose from around £15 a gram to £30 a gram. This was in response to (QE) being adopted by central banks.

This increase in value follows the logic that QE creates inflation, and gold prices generally rise alongside inflation.

Due to enforced lockdowns around the world, Covid-19 and the global recession triggered a rush for insurance against the financial turmoil.

In August 2020, the price of gold rose above $2,000 an ounce for the first time in history.

Since then, the price has slipped back and, at the time of writing, gold is currently valued at $1,305 an ounce.

Reasons to buy gold

Preserve your wealth

Compared with holding cash, gold can be a good option. If you had £50 of gold in 1980, and £50 in paper money, during the intervening 40 years the gold has increased in value, but your £50 note has not. And your £50 could not buy as much as it would have in the 1980s.

Hedge against inflation

Rising inflation rates often drive an increase in the price of gold. Some investors might decide to buy gold as a hedging asset if they are losing money.

Find a safe haven

Gold is a scarce resource. Over time, it has maintained its value and has proven to be a useful insurance during uncertain financial climates.

Unlike currencies, gold isn’t directly affected by interest rate decisions and can’t be printed to control supply and demand. This makes some investors feel that gold is a safe haven.

Reasons not to buy gold

It produces nothing

If you buy a few grams of gold today, in years to come, you’ll still own the same few grams. While the price may have risen if you’re fortunate, it won’t have produced anything.

If you invest in company shares, the companies you invest in produce stuff with value. Over time, your investment in a sound company or good investment fund will grow as the company stock price increases.

It’s too volatile

Gold has the volatility of stocks, but the returns are similar to what you’d see in bonds or treasury bills or government bonds. There is no upside to this equation for a serious investor. If you’re going to have volatility, you’re more likely to see better returns by investing in equity markets.

There are few ways you can diversify your gold holdings

Unlike equity investments, which you can spread over different industries and regions, the only way to limit the impact of a fall in the price of gold on your portfolio’s value is to limit the amount of gold you hold in it.

Long-term returns are terrible

When the price of gold goes up, it gets a lot of attention. But, over the long term, the value of gold doesn’t really go up that much. Indeed, it can go for long periods generating no return.

How to view gold when you take an evidence-based investment approach

Like you, we’re interested in wealth creation. The investment approach we take at First Wealth provides portfolios built with thought, structure, and discipline.

While gold can serve a useful purpose for some investors, we believe your money can work harder for you elsewhere. The price of gold can stay virtually static for long periods of time – sometimes decades – without generating any returns.

If you’re looking for a safe haven for your money and want to hedge against inflation, get in touch. Email hello@firstwealth.co.uk or call 020 7467 2700.

Articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute financial advice. You should not act or rely on any information contained on this website without first seeking advice from a professional. 

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.