Is buying gold a good investment?

Gold is a precious metal, and can increase (as well as decrease) in value. But does that make it a good investment? Let’s take a look!
Is buying gold a good investment?
Reading time: 7 mins

Gold is one of those things that has been prized since the first human found it laying in a stream. It’s become intertwined with nearly every human culture from the Aztecs to the ancient Greeks and Egyptians. In many early civilisations, gold was reserved for their gods and rulers, but almost everyone who had gold was able to use it as a form of currency.

Fast forward to the modern-day, and we still have a huge passion for this shiny precious metal. We still use gold for things of importance, such as jewellery and wedding bands, and while they may look at you a bit funny if you try to pay with a gold nugget at Tesco, it is something that many investors hold.

 

Does gold make a good investment?
There are a lot of going reasons that you may think about investing in gold. For a start, it’s been something that has been considered valuable since the dawn of recorded history. Historically, gold has been considered a ‘safe’ investment as its price often climbs when the market experiences a rise in uncertainty whether that is in shares, bonds or currency [1]. And, as a physical asset, it’s unlikely that the price of gold would drop to zero. While the same was thought of oil until it turned negative on the 26th April 2020 [2], gold poses less of a storage problem. However, the recent experience of oil demonstrates why holding lots of different investments can be a good thing. And by holding different assets, we mean shares from a selection of companies, a wide range of bonds, and various types of commodities – this strategy is called diversification and it allows you to mitigate risk.

 

Ways to invest in gold
When you think about investing in gold, you probably jump straight to thinking about purchasing those big shiny gold bars you see in films. But with a single 1kg bar currently costing upwards of £40,000[3], it isn’t something that’s easily obtainable for most investors and requires a lot of research and thought to go into it. Of course, there is the option of investing in smaller amounts of gold, in the form of smaller bars, coins or even jewellery.

It’s worth noting that investing directly in gold isn’t quite the same as investing in stocks and shares. This is because when you physically purchase gold, whether in gold coins or bullion (the gold bars you see in the films) you either have it sent to you or have to pay someone to look after it. Either way, you’ll want to think about having somewhere safe to store it – many people will use third party services to buy gold, and hold it for them, these services are respectively known as brokers and custodians. If you want to store it at home you’ll need to consider a safe and insurance, all of which add to the costs of investing.

However, purchasing gold isn’t the only way to invest in it. You can also buy gold in a non-physical sense by purchasing gold-focused funds. These funds are a collection of investments with gold as a unifying factor, so the investment typically follows the fluctuating price of the gold. This means that if the price of gold goes up 10%, then your investment should also go up by around 10%, and vice versa if the price of gold falls – one thing to note thought is that prices may not move perfectly in line due to fund operating costs and trading constraints.

You could also invest in gold mining companies, although this adds an element of risk to the investment as these companies could go bust. You should also do a lot of research on the company to ensure that they’ll deliver a return and are profitable – there’s plenty of small mining companies who are still exploring and haven’t actually found gold yet.

So, if you really want to invest in this precious metal, there are a few ways you could do it.

 

Can gold beat inflation?
There are a lot of articles (and also plenty of internet forums) suggesting the price of gold follows inflation, so by putting your money in gold, you can maintain its purchasing power – meaning that, theoretically, you should be able to buy the same amount with it in 10 years as you can now.

However, this isn’t strictly true, and as with all market investments it isn’t guaranteed. In fact, according to research done by Campbell Harvey, professor of finance at the Fuqua School of Business, the ability for gold to keep up with inflation isn’t measured in months, or even years – but rather in decades and centuries. One quite extreme example he found of this was by comparing Roman soldiers’ wages in gold to the current US Military pay – which worked out roughly the same.[4]

When looking at investing, it’s often a good idea to take a long-term approach, and the same can be said of purchasing gold.

 

Is gold a ‘crisis’ investment?
April 2020 has been a monumental month for financial markets around the world, seeing stock prices falling, oil having a negative price for the first time, and yet the price of gold has continued to go up[5]. Why is this?

As investors lose faith in the markets, many might panic and sell shares and other riskier investments and buy up cash or gold, as these are considered to be safe havens in comparison to the ups and down in price that is seen elsewhere.

However, by selling shares once the price has dropped, these investors have made their losses real.

 

Importance of a diverse portfolio
At Wealthify, we believe in holding a diverse range of investments and not over investing in a single asset class, as that carries a lot of unnecessary risks. Gold can act as a diversifier in your Plan, to help maintain value – holding or potentially increasing in value if the markets crash, however, this isn’t guaranteed.

If you’re building your own investment plan and are thinking about adding gold, then it’s a good idea to do a lot of research, including who you are buying the precious metal from and where you plan on storing it. However, if you’re using an online investment service, like Wealthify, then you’d leave the decision of whether gold is in your plan or not up to the experts. They’ll do the hard work in building a diversified investment plan, which will include things like shares, bonds, property and cash.

 

References:

1: https://www.gold.co.uk/gold-price/45year/kilograms/GBP/

2: https://www.bbc.co.uk/news/business-52350082

3: https://www.gold.co.uk/gold-price/one-month-gold-price-per-kilo/ - price accurate as of 30th April 2020

4: https://uk.reuters.com/article/us-gold-inflation/gold-as-an-inflation-hedge-well-sort-of-idUKKCN1GD516

5: https://www.gold.co.uk/gold-price/3-month-gold-price-per-kg/

 

Please remember that past performance is not a reliable indicator of your future results.

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

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