Investing in gold seems attractive when news reports talk about high prices, but looks can be deceiving.
In the last 18 months, gold prices have risen about 60%, reaching around £2,500 to £2,600 per ounce. However, history shows that gold does not always protect against inflation; its long-term returns are lower than stocks, and making a poor timing decision like Gordon Brown’s well-known sale from 1999 to 2002 can be expensive. Here’s a simple breakdown of the advantages and disadvantages to help you decide if gold should be part of your investment portfolio.
How rare is gold?
All the gold ever mined could fit into a cube that measures only 22 meters on each side and weighs about 216,000 tonnes. This limited supply contributes to gold’s allure. As Warren Buffett humorously states, “We dig it up, melt it down, bury it again, and pay people to guard it.” Gold doesn’t generate any income, unlike businesses or bonds, so its value is based solely on what someone is willing to pay for it.
What drives the price?
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Investor Sentiment and Safety: Geopolitical events and recession fears drive investors to seek out perceived safe assets.
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Central Bank Purchases: Since Russia invaded Ukraine in 2022, countries have bought over 1,000 tonnes of gold to build sanctions-resistant reserves.
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US Dollar and Interest Rates: A weaker dollar and lower interest rates make holding gold, which doesn’t earn interest, easier for investors.
These factors are unpredictable, leading to significant fluctuations in gold prices.
Does investing in gold give me a better chance of matching inflation?
Gold is often marketed as an inflation hedge, but the data are lukewarm. Academic work finds the metal only keeps up when inflation is already running hot, and even then, not reliably. During the high‑inflation 1980‑84 period, for example, the gold price actually fell sharply in real terms. Global equities are usually a cleaner, more direct hedge.
Gold did shine in the 1970s and the 2000s, but over the full 50‑plus years it has lagged equities by a wide margin while showing similar day‑to‑day price swings.
What is the timing trap?
From 1999 to 2002, the UK government sold 395 tonnes of gold at an average price of $275 per ounce, which was close to a 20-year low. Today, that gold would be worth about ten times more. Even experts and finance ministers find it hard to time the market correctly, which serves as a caution for anyone looking to trade in and out.
Does gold deserve a slot in my portfolio?
If you have to, keep it small and through a low-cost fund. Remember, gold is more like insurance rather than an asset for growth: you shouldn’t expect any income, and there may be times of low or negative returns. Think of it as a stabiliser for your portfolio, not where your growth will come from. Investing in physical gold coins or bars involves extra storage and insurance costs. A regulated UK-based gold fund within an ISA or SIPP could be a more straightforward and tax-efficient option for most investors.
Before you commit to this, remember that a standard “whole‑world” global equity fund isn’t 100% tech and banks; it also includes businesses, such as miners, who do well when gold prices rise.
Gold shines the brightest after its price rises, but its performance against inflation and stocks is not very impressive. If you want a small amount of gold for security, keep costs to a minimum, don’t try to trade it, and avoid getting caught up in the fear of missing out.
For building long-term wealth, a well-diversified portfolio of equity and bonds has historically been more effective. If you’d like to explore how we can help you build a robust portfolio for the long term, schedule a free, no-obligation chat here. A guide on selecting a financial advisor is also available here.
The guide is for informational purposes only and is not a substitute for personalised financial advice. The content should not be relied upon in its entirety and shall not be deemed to be or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Individuals or companies should only act upon such information if they receive appropriate professional advice after thoroughly examining their particular situation.
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