The ins and outs of investing in gold

With gold prices hitting record highs, Richa Ved explores the process of investing in the precious metal

Gold has hit a new all-time high of $2,295 a troy ounce this week thanks to global market signals that major central banks could be about to cut interest rates.

The precious yellow metal has consistently been making the headlines for hitting new record highs since 2022, with a striking rise from around $1,600 per ounce in October 2022 to nearly $2,300 now.

This ‘bullish’ momentum has caused a paradigm shift in narrative around gold as an investment, with investors expecting the prices to continue rising for the next few months.*

Let’s get into what caused the rise, gold’s investment prospects, and what to expect in the near future.

What caused the rise?

Gold is typically seen as a ‘safe haven asset’, known to rise in demand during market volatility and uncertain times. Previously, markets witnessed all-time high gold prices after the 2008 financial crisis and the Covid-19 pandemic.

With promising US economic growth expectations, the gold rush might come as a surprise. Many non-US markets – such as China, the United Kingdom, and a few EU countries – have been key drivers of the gold demand surge.

Several countries have observed high inflationary pressures and slow economic growth in recent months, leading investors to safeguard their portfolios by buying gold as an inflation hedge.

Mouthy Money note: Inflation is the process by which the value of money in your pocket decreases as central banks increase the supply of money in the financial system and too much consumer demand chases too few goods and services. Gold, and other investments, 'hedge' against inflation by sustaining a value despite monetary devaluation.

China’s real estate crisis has pushed Chinese investors’ demand for gold to hedge against economic instability. About half of all gold shipments in January went to Hong Kong and mainland China, according to investment bank UBS.

Now, the anticipation of interest rate cuts, uncertainty posed by the upcoming US presidential elections, and the geopolitical instability due to ongoing global wars and conflicts, have driven investors toward gold.

Types of gold

• Physical gold: This is a popular, and old school, way of purchasing gold – in the form of bullion bars, coins or jewellery. You receive physical possession of the gold and must arrange for proper storage and insurance yourself.
• Gold exchange-traded funds (ETFs) or certificates: You can invest in gold through ETFs (funds which hold gold and trade on the stock exchange) or gold certificates (offered by some financial institutions). This will allow you to own gold without possessing the physical metal. Plus, you can make a tax-efficient investment if held in a Stocks and Shares ISA.

You may also invest via stocks of companies involved in gold mining, refining or trading. However, their fluctuations are also dependent on the company’s performance and market conditions.

Pros and cons of investing in gold

Pros

• Relative liquidity: Gold is generally a liquid asset, and is easy to buy and sell – especially compared to other assets such as property. It is a widely accepted and fungible asset that can be sold to any gold dealer or jewellery store.†
• Hedging feature: Gold acts as a hedge against high inflation and market instability making it a ‘safe haven asset’ during times of macroeconomic uncertainty.
• Diversification: Gold helps manage your portfolio’s risk diversification as it is typically not affected by price changes in other asset classes (such as stocks and bonds), and instead, its price moves in the opposite direction.‡
• Tax advantages: For bullion coins purchased from The Royal Mint, there is no Capital Gains Tax (CGT) applicable to the profit made while selling.

Cons

• No consistent income: Unlike other assets, gold investments do not offer any consistent yields or dividends – known as income – and can only be profitable with the capital gains on sale.
• Associated costs: Physical gold comes with associated costs such as storage fees, insurance premiums, brokerage fees etc. ETFs have associated transaction costs while trading too.
• Complexity, knowledge and research: Gold investing differs from investing in stocks and such markets. It takes time to research and grasp the knowledge of investing in precious metals. Plus, it is important to ensure the gold dealer’s background, deal offered, and quality of gold offered, to avoid any fraud.
• Future of gold mining and environmental effects: Gold is a rare metal and its demand, supply, and pricing depend on future mining capabilities and remaining gold quantities within the earth. This might change with advanced mining (increased supply), depletion of gold deposits (decreased supply), or environmental side effects of mining.

What to expect

Gold has long been a good portfolio-diversifying investment. With the precious metal continuing to hit all-time highs, the expectation in the market is for gold’s price to keep rising for a while, at least till the end of 2024, as central banks and investors continue purchasing gold. This is by no means guaranteed though.

While the macroeconomic backdrop for gold is looking more promising than ever, you must consult your financial adviser and use a professional research-driven approach before making any investments. You can choose an appropriate gold investment strategy depending on your investment goals, risk tolerance and portfolio composition.

Plus, keep a close eye on signs of any market fluctuations, economic changes, or geopolitical occurrences that could affect your portfolio.

*Investing in gold, as with any other investment, carries risk. The price can go down as well as up so do not invest money you cannot afford to lose.

†Ensure you are doing research into gold prices before looking for a physical buyer and be clear what the best price possible is. Jewellery stores and other phyiscal dealers might not buy gold from you at the exact market rate as they will want to make a profit on the precious metal too.

‡If you are considering investing in gold as part of a wider portfolio it is important to do as much research as possible. If you have complex wealth management needs it is potentially worth considering consulting with a financial adviser.

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