Well, you might be forgiven for thinking this is just another silly season Christmas blog post. But there’s a genuine, serious point here, we promise. While we don’t recommend investing in frankincense and, if we’re honest, we’re still not sure what myrrh really is – gold is certainly an option when it comes to your investments. But is it a sensible approach?
Investing in gold may have a bit of a reputation as something that conspiracy theorists do as an alternative to stuffing mattresses full of cash, but it’s used as a serious investment tool by many people. However, gold is a bit of a controversial subject. While many believe it to be an out-dated investment that’s never really performed as described, some do still consider it to be a useful tool in diversifying portfolios and hedging against risk.
In this article, we’ve summarised the key things you’ll need to know before making a decision on whether investing in gold is something you might be interested in.
Please note that this isn’t investment advice and shouldn’t be taken as such. Always speak to a qualified financial adviser before making any investment decisions.
Why would you invest in gold?
So, what are the benefits of gold? Well, those that tout the benefits of gold often talk about it being a “safe haven”, meaning it’s insulated from the rest of the market and its movements. There’s also a perception that its price remains constant regardless of inflation.
Both of these aspects make gold a favoured choice for conspiracy theorists predicting stock market doom and the collapse of society. But, more seriously, they also make it a good choice for those looking to seriously diversify their portfolio and protect against significant downturns across the entire market.
Are there any downsides to investing in gold?
The benefits above make gold sound an attractive option. But there are some downsides. Part of the trouble with gold is that, while it might insulate you against market downsides, it also doesn’t benefit as much (or, in some cases, at all) from gains on the stock market. This makes the opportunity cost of investing in gold high, as you may be missing out on potential profit from the stock market.
Plus, when you invest in the stock market, you’re generally investing in businesses or commodities that are tied to real world growth. Even if the stock market falls in general – or the specific assets you’ve bought fall, the businesses themselves are “productive assets”, meaning they should be continuing to grow. So, your asset should grow over time. With gold, once you’ve bought a set amount of it, that’s all you’ve got. You’re reliant on the price of that fixed amount going up, which isn’t always the case.
How has gold performed?
Well, as we’ve just said, it isn’t always the case that the price of gold has gone up. In general, it hasn’t been a fantastic investment. While the price of gold has risen in general over the last two decades, it did most of the rising in the late noughties, with a fairly sustained dip throughout the 2010s.
Now, past performance isn’t an indication of how gold will perform in the future. But there isn’t a lot in gold’s past performance to indicate that it’s a great investment – or even that it’s particularly safe, as its price does fluctuate a lot. However, a recent steep rise in its price has caused another round of calls to invest in gold, particularly as we head into a likely period of very low interest rates caused by the pandemic.
The real trouble with gold is that, to maximise your profits, you often have to buy or sell it at exactly the right time – when the price is right at its peaks or troughs. This is difficult even for seasoned investors, and makes it a challenging investment prospect.
How do you go about investing in gold?
Gone are the days where you had to put a safe in your home to invest in gold. While you certainly can still buy physical gold in the form of bullion, coins or jewellery – and you certainly could still store it in your home, many investors are choosing to use professional gold storage services.
There are some other options for those looking to invest in gold with a bit less hassle, too. Some of these more modern options include investing in gold futures, exchange traded funds (ETFs) or mutual funds, all of which are linked to the price of gold – but crucially mean you don’t have to deal with holding physical gold.
What’s our take?
When it comes to investing in gold, in general it’s important to be very cautious. There are lots of conspiracy theories, dodgy advice and outright scams. It’s rarely a good idea to invest in small amounts of gold jewellery or coins, as these items can be very hard to value accurately. If you see an advert or service promising massive returns or complete safety by investing in gold, take it with a pinch of salt. Remember if something seems too good to be true, it almost certainly is.
As part of an appropriately managed large portfolio, investing in gold can be a sensible way to manage risk. But portfolios of this size should be professionally managed and tailored to your own appetite for risk and financial circumstances.
So, there you go. Only one of the three wise man brought a gift worth investing in – and even then only in specific circumstances. We’re not sure what that means the true meaning of Christmas is… but we’re fairly sure you shouldn’t take a nativity story as investment advice. Merry Christmas!
If you’re looking for some financial or investment advice this festive period, speak to Face to Face Finance. Our team can create a dependable, coherent investment strategy that’s tailored to your needs. Get in touch here.