We take a look at the pros & cons of investing in the precious yellow metal that is gold, and if it could form a useful part of your investment portfolio.
Gold has been used for millennia as a store of wealth and still today it holds an allure for many investors. It’s a divisive investment, however, with plenty of fans and critics alike. Let’s look at the pros and cons of investing in the yellow metal, to see if it could form a useful part of your portfolio.
Is Gold A Good Investment?
Many of our articles about a certain type of investment begin with what it actually is, but gold probably needs no such introduction. Investors can either hold physical gold in the form of bars, coins or jewellery, or invest in it using exchange-traded commodities (ETCs), which track the gold price and trade on a stock market like shares. There are also gold mutual funds but these usually invest in gold mining companies rather than the metal itself, and so they can get caught up in stock market volatility.
Gold is viewed by many as a good way to protect against inflation. Its price has tended to rise faster than inflation although that isn’t always the case. With inflation around the globe currently much higher than in recent years, however, many investors have been turning to gold.
It also offers portfolios diversification and could offer a measure of protection against stock market volatility. The returns of gold are driven by the ups and downs in the gold price, which is different to the movements of the stock and bond markets. This means gold has a low correlation to both equities and bonds, or in other words, it zigs when they zag.
So when markets are falling, you often see gold holding up much better or even rising, like we saw in 2020’s ‘covid crash’ or during 2007-2008 in the midst of global financial crisis. This is why gold is often viewed as a ‘safe haven’ investment that investors turn to in times of market distress.
On the other hand, unlike most equities and bonds, gold doesn’t yield an income. Therefore its returns are limited to its price movements, whereas the dividends and coupons offered by stocks and bonds can be reinvested to deliver compound growth.
While gold has often been good at offsetting stock market volatility, it can also be volatile itself at times. There have been periods lasting several years where the price of gold has fallen. After the gold price peaked in 2011, for example, it went on the decline and took another nine years before it reached that level again.
Gold also has to be transported, stored and insured, which all comes at a cost. Gold ETCs are now available with low fees though, which can be a cost-effective way of avoiding all those charges.
How Has Gold Performed?
The period of time you look at will determine your view on whether gold has performed well over the long term. For instance, over the past ten years you’d think gold has been a poor performer with a paltry return of 8.3%, compared with the global stock market’s 185.4% gain. Over the past twenty years, however, gold has beaten the stock market. That’s because if you look over the ten years before the last ten, gold rose a whopping 369.9% while the stock market mustered an unremarkable 62.1% return.
Our View On Investing In Gold
You might think that gold’s volatility and potential to deliver above-equity returns means it would be more suited to higher-risk investors seeking higher returns. We don’t think gold should be viewed as a main driver of long-term returns though, due its potential to go through long periods in decline.
As gold’s volatility is often in the opposite direction of the stock market, it can be useful to offset equity turbulence. So we actually believe gold could be better suited to more balanced and cautious investors. Having said that, its volatility also means we think it’s prudent to limit exposure to gold. That’s why our portfolios have no more than single-digit percentages invested in the yellow metal.
We think gold can be a useful addition to your investments. It can add more variety to a portfolio composed entirely of equities and bonds, and could act as a buffer against stock market volatility. It can also provide a measure of protection against the eroding effects of inflation. We think a little gold can be a great building block to help create a really well-diversified portfolio.
Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.