Should I invest in Gold?
Some online sources, principally TikTok and YouTube Shorts, claim that gold can be a good asset to help us beat inflation and economic uncertainty in the long run. Here we explore the truth of this and outline what some of the options might be to get involved in owning gold or other precious metals.
We should start with the obvious point, it is not a good idea to hold an entire portfolio as gold; nor is it a good idea for those who struggle to save from their salary to consider. The reason is that liquidating gold to cash is costly and the whole idea of investing in gold is to hold it for several years, if not decades, rather than just a few years.
Let’s examine the history and the facts around gold prices. Historically gold does seem to hold its value despite inflation, however, the price of gold has been known to be highly volatile. It doesn't offer dividends or interest, and its returns depend solely on price appreciation. In short, the value of gold does seem to rise with inflation. Despite this, there is no established relationship in the short term, evidence from market data suggests that holding gold for five years would not match inflation. Holding gold for 20 years has worked historically (no guarantee that it will continue to work). Typically an extra 1% on UK inflation is matched by a 0.8% increase in the market price of gold, but in the grand scheme of things, gold has an upward price trend. In fact, it recently hit an all-time high as commercial investors are becoming increasingly drawn to it. All of a sudden going to your bank to talk about ISAs might seem more attractive than sleeping with a couple of gold bars hidden under the mattress!
Perhaps that is a bit of artistic licence – investing in physical gold requires secure storage, insurance, and higher costs due to dealers' premiums, VAT to buy (except coins) and potentially capital gains tax which can be as high as 28% in the UK when selling gold.
Alternatives to holding physical gold bullion are to consider Gold Exchange-Traded Funds which can be bought and sold like stocks. Examples include iShares Gold Trust and SPDR Gold Shares. These aim to track the price of gold but do come with management fees. The point here is that the investment is in ‘paper gold’, not physical gold, which reduces some of the costs but still attracts capital gains tax when liquidating a position.
Investing in gold can work as a way to preserve capital and protect against inflation and economic downturns. However, it's important to understand that like all investments there is an element of uncertainty involved. It is important to consider why you want to invest in gold and if other financial products, perhaps ISAs or Unit Trusts can meet those needs. Also, time horizon is a key factor, making this a difficult path for individual investors unless they need a long-term investment strategy to diversify their portfolio and secure protection against inflation.
This does not constitute direct financial advice. Mentions of companies or products do not constitute an endorsement.