Golden days? Why to invest in gold (or not)
December 11, 2023
4 minutes to read
Is gold a useful investment?
The pros and cons at a glance:
+ Safe haven: gold is often seen as a safe haven during economic and political unrest. In times of devaluation or geopolitical tensions, gold tends to retain its value or even rise in price. Some investors also invest in gold because they have reservations about the robustness of our financial system; it is not without reason that gold has served as a form of payment for thousands of years.
+ Liquid investment: because gold will (likely) always store value, there will always be supply and demand. Anyone who wants to sell off their gold quickly will always find buyers.
+ Hedge against inflation: historically, gold retains its value in times of inflation. It is seen as a good way of storing purchasing power, as opposed to cash which can lose some of its purchasing power. The supply of gold is finite: it doesn't grow on trees and you can't print more gold. Finding new gold mines takes plenty of time and investment. The market will therefore not be flooded by new supplies. Due to its scarcity, gold offers protection against inflation.
+ Diversification: gold can be used as an instrument for diversification of an investment portfolio. It often has a low or negative correlation to traditional assets such as equities and bonds, which can help reduce the overall risk of the portfolio.
+ No credit risk: as it is a physical commodity, gold has no credit risk, unlike bonds. Simply put, gold cannot go bankrupt, companies can.
- No returns: gold generates no interest, coupons, dividends or cash flow. Any return depends entirely on an increase in its value. Unlike shares, for example, it does not generate new value, rather it is a way of "storing" value.
- Storage and insurance: physical gold requires secure storage and insurance, which incur additional costs.
- Volatility: the price of gold can be volatile, influenced by global events, speculation and currency fluctuations. For example, at the end of 2020 the price of gold tumbled around 20% when the world started to recover from the economic shock of the pandemic.
- Underperformance during economic growth: in periods of strong economic growth gold tends to underperform compared to other asset classes.
- The price of gold is usually quoted in USD: as a Belgian investor, you should therefore allow for a currency risk. In addition to the risk that the price of gold itself may fall, the effect of this may be exacerbated by fluctuations in exchange rates (of course the opposite is also true).
Why has the price of gold soared in recent months?
With a price rise of more than 10 per cent, gold has made a remarkable comeback in 2023. There were several reasons why the precious metal shone more brightly. Firstly, the world has gone through some uncertain times in 2023, which prompted several central banks to stock up on gold. Gold is always considered a safe haven in times when nerves are tense. World Gold Council figures show that central banks have never before bought so much gold (around 800 tonnes) as they did in the first nine months of 2023.
However, it was especially after the outbreak of the conflict between Israel and Hamas that the precious metal shot up sharply. Although it soon appeared that the conflict was not going to set the whole Middle East alight, the price of gold still hit a new record in the following months. This time around, the fever was heightened by a weaker US dollar, a fall in US Treasury yields and the expectation that the Federal Reserve will cut key rates faster than expected in 2024. The reason is: because gold does not pay interest, gold becomes more attractive than bonds when interest rates are falling. A falling USD is also good for the price of gold, as gold becomes cheaper for buyers outside the US (gold is mainly traded in USD). Another reason why the gold price reached new heights is the fact that most Indians marry in the period from November to February. The demand for gold – not just for wedding rings – also rises then. India, together with China, is the largest buyer of gold jewellery, coins and bars.
Is there still upside potential?
With gold prices peaking recently, investors may be wondering: is it still a good time to get into this? At the moment (December 2023), most analysts are bullish about gold; in other words, they believe that the price of gold will continue to rise and find new peaks. Expectations can of course change swiftly, and there can always be a surprise lurking around the corner that will push prices back down.
Whether it is still worth investing in gold will depend largely on your objectives. Maybe you see gold as a long-term buffer against geopolitical stresses? Or as a way to diversify your portfolio? Then the timing may be less relevant. Do you see it as an opportunity to surf the market and get out again in a few months’ time? Then it may make sense to get involved.
How to invest in gold?
1. Physical coins and bars
This is the classic way to invest in gold: by buying coins or bars. You can buy gold from a gold dealer (please note: you can only pay up to EUR 3,000 in cash); you cannot buy gold physically from any major bank nowadays. The Napoleon and the Krugerrand are well-known and frequently traded coins. You can also buy gold bars, ranging from a few grams to one kilogram. If there is a high demand for coins and there is a shortage, the price difference between coins and bars can increase.
You can also invest in gold via trackers or ETFs (Exchange Traded Funds). The advantage is that you can do so from home, and don't have to worry about a secure storage location. You do have to pay management fees – although they are generally fair (around 0.12%). Gold trackers are subject to a stock market tax of 0.35%, once on purchase and again on sale. The largest gold trackers track the performance of the gold price by investing in physical gold. Some (very cautious) investors prefer to stay away from trackers because they are worried about the underlying assets: there is, after all, quite a difference between holding physical gold in a safe at home and an entry in an investment portfolio saying that you own a percentage of some gold held somewhere else.
3. Shares in gold mines
Another and more risky way to get exposure to gold is by investing in the individual shares of gold mining companies, either in a tracker that mimics the performance of a group of gold mining shares, or in an actively managed fund that invests in gold mining companies. You can move up the speculative scale by investing in new companies and hoping that they will hit a golden vein and/or will float up on the back of a rising gold price. However, you need to bear in mind that this can be very wild ride: these companies can go bankrupt, while a gold coin or bar cannot. They may also operate in unstable regions. Shares of large, established miners are still risky, but less speculative. They typically do not focus solely on mining gold, but also on other commodities and precious metals.
4. Futures and options
Investing in gold through futures and options is a more advanced and more speculative approach. This type of investment is intended for investors with a high risk tolerance and a thorough understanding of the financial markets. With a futures contract, you make an "agreement" to buy or sell gold at a predetermined price on a specified date in the future. They offer the potential for large profits, but also major losses, especially as futures often operate using (debt) leverage. An option gives the holder the right, but not the obligation, to buy (call options) or sell (put options) gold at a predetermined price within a certain period. They offer more flexibility than futures, and can be used for both speculative investment and risk management (hedging). However, the value of options can fluctuate rapidly, meaning that they involve a higher risk.
Do you want to invest in gold too?
- Log in to Keytradebank.be on your laptop or desktop
- Click on Advanced at the top, next to the search by instrument name, symbol or ISIN
- Tick the asset class you want (trackers, funds, options, etc.)
- Search using the term Gold, or enter the name of a specific gold mine share