From necklaces and coins to mobile phones and teeth - gold can be found nearly everywhere. And around $1.6 trillion is privately invested in the precious metal.
So what is it about gold that’s so attractive to investors? And with so many other options available, is gold a good investment? Let’s find out.
Why invest in gold?
Gold is usually invested in strategically, typically making up a small portion of an investment portfolio. There are several reasons why an investor might invest in gold.
To guard against inflation
Inflation occurs when the value of goods increases over time. For example, today’s £10 note isn’t able to buy as much as it did 30 years ago because bread and other items have gone up in price.
Gold, however, doesn’t have a fixed monetary value like a £10 note. Its value is determined by what people are willing to pay for it. And historically, its value has tended to increase over time.
Between 1971 and 2020 the price for an ounce of gold rose from £15 to £1,206 (80 times). Yet £15 in cash buys far less today than it did in the 70s.
That’s not to say that gold will necessarily continue to rise in price. In fact, between 1980 and 2006 it mostly fell in value. And between 2013 and 2016 it fell by around 30%.
But, for the most part, the price of gold has outpaced inflation which makes it an attractive alternative to cash and other higher-risk investments.
To guard against economic instability
Gold has an interesting relationship with the stock market. It tends to rise in value when the stock market’s going through a bad patch, and lose value when the stock market’s doing well.
For example, the chart below shows how the price of gold changed during the 2020-21 Covid pandemic.
The price initially shot up between March and September 2020, as the economy struggled against the impact of the virus on people’s lives. But after the stock market continued to make unexpected gains (contrary to initial expectations), the price of gold fell. Then, as infections began to rise again and the economy looked more fragile, the price of gold started to increase once more.
Part of the reason for this is that investors were moving some money away from the volatile stock market and into gold, which is considered a more stable and lower-risk investment.
To benefit from value growth
As we’ve seen, the price of gold can change a lot over a short space of time. And this often happens at times when the stock market is in decline.
For example, the price of gold grew 12% between the end of January and April 2020. Meanwhile, the S&P 500 (the largest stock index) fell by 11%.
Of course, gold can fall in value too. It fell from £1,464 to £1,323 in the 12 months leading up to September 2021.
Is this a good time to invest in gold?
As we’ve seen, there’s more than one reason to invest in gold. So whether now’s a good time to invest in gold will depend on your goals and circumstances.
If you’re looking to beat inflation over a long period of time, investing in gold might be worth considering. Historically, long-term investments in gold have paid off.
If you’re looking to invest for short-term gains, the risk will be much higher. As of September 2021, the price of gold is near an all-time high. But that’s not to say it won’t increase further, and it could fall in value too.
Can you invest in gold through your pension?
Pension plans carefully balance a mix of investments to manage risk. Because gold is considered a lower-risk investment, it can make up part of a pension’s portfolio.
If your pension plan is a type of target date fund, it will change its mix of investments over time to compliment your expected retirement age. This is so that you benefit from higher-risk assets with higher growth potential while you’re young, and lower-risk assets that are more stable when you’re older. So while your plan may include little or no gold while you’re young, it could start to move some investments into gold as you get older.
You can ask your current pension provider whether gold makes up part of your portfolio. And if it doesn’t, you could look around for a more suitable pension if you’re certain you want to invest in gold.
PensionBee’s Tailored Plan invests in commodities as you approach retirement, including gold (up to 0.6% of total portfolio balance as of September 2021). You can learn more about it and our other pensions on our Plans page.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
