Gold: the pros and cons of investing in the precious metal


Updated on 23 January 2025 | 0 Comments

As more and more people join the gold rush, we analyse the pros and cons of investing in the precious metal.

Does holding gold make sense for investors?

Over the past year, the gold price rose 28%, hitting $2,664 per troy ounce, close to the all-time high. 

This was due to economic and political concerns, continued high inflation and conflicts around the world, such as the Israel/Hamas war in the Middle East and the continued war in the Ukraine.

The gold price tends to do well in difficult times for the stock market - and the world. 

Meanwhile, the Royal Mint said it had a 'record year' for purchases of its gold bars and coins, with revenues from gold bullion sales up 153% year-on-year. 

However, some are more hesitant when it comes to investing.

Few asset classes divide opinion as sharply, so here are five reasons to consider gold – and five reasons to give it a miss.

Pros

1. Gold can diversify your portfolio

Diversification makes sense and gold won’t react to events in the same way as traditional asset classes in your portfolio, according to Adrian Lowcock, director of investment management at Evelyn Partners.

“It’s different to equities and bonds,” he said. “Gold has been an excellent store of value and long-term protection against inflation.”

This is why it’s seen as a safe haven investment. “When investors become risk-averse and take money out of assets such as equities, gold is one they consider,” he added.

2. It has acted as an insurance during times of geopolitical stress

Investors tend to turn to gold in tough economic times. 

“It’s one of the few asset classes to maintain its negative correlation at times of severe market stress and can be a hedge against hyperinflation,” says Juliet Schooling Latter, research director of Chelsea Financial Services.

3. Now could be a good time to get involved

“There’s no denying that 2024 was a record year for gold," said Rick Kanda, managing director at The Gold Bullion Company.

"It’s reached colossal new highs and broken records that none of us expected. This is thanks to a result of economic uncertainty, changes in global inflation and also increased demand for this commodity."

Kanda expects the commodity to continue its rise in 2025. “It’s predicted that by the end of 2025, gold will rise to $3,000 per troy ounce and thanks to its increased rises throughout this year, I fully expect that this will be the case," he added.

"Global central banks are expected to maintain their gold buying momentum, which will be key to gold hitting that $3,000 value mark... I predict that gold will continue to see significant increases, especially if economic instability continues."

Meanwhile, Kanda pointed to geopolitical events that could help maintain gold's attractions as a 'safe haven' investment.

“Recently, Trump's presidency and Trudeau's resignation have contributed to an environment of increased uncertainty and market volatility, which supports the likelihood of gold being viewed as a safe-haven asset," he said.

"These factors have traditionally driven investors toward gold as a reliable investment during unstable times."

4. There are different ways to get exposure

You can get involved in three main ways: buying physical gold; getting exposure through an Exchange Traded Commodity (ETC); or buying shares in gold mining companies.

To enjoy the full diversification benefits you’ll need to buy physical gold, whether in the form of jewellery, gold coins, or parts of bars held in storage by specialist companies.

ETCs, which track gold price movements, are popular as they can be easily traded, while you can buy individual shares or specialist funds that own a wider number of stocks.

Gold ETFs also hold physical gold as a hedge. 

“Gold Exchange-Traded Funds (ETFs) are a way of trading gold on the stock exchange," Kanda explained. "Buying and selling gold ETFs is usually quite easy as large numbers of buyers and sellers mean that the market clears relatively quickly for any given trade.

"However, to function, gold ETF fund managers must first buy physical gold and then store it in a vault and the value of the fund then mimics the spot price for the stored gold.

"This means the quality of gold ETFs depends on the prudence and ethics of the firms that manage them. Managers, for instance, may claim that their fund is '100%-backed by physical gold' but it may not be.”

5. Take advantage of improving gold miners

Investing in mining companies is another way to gain gold exposure. However, while the mining giants, such as Rio Tinto and Glencore, pay decent dividends, the companies are exposed to the vagaries of the economic cycle and the shares can be volatile. 

Also, the smaller mining exploration company shares can be a risky investment, so investors must do their own research and be prepared to lose any money they invest. 

However, mining companies must keep production costs lower than the gold price to make a profit. If this works then they can benefit from leveraged gold price exposure, according to Lowcock.

“Gold miners have a minimum cost of extraction to mine gold so once they price is above that minimum cost any excess is pure profit to the company,” he said.

Want to shield your investments from the taxman? Open a Stocks & Shares ISA with Hargreaves Lansdown now.

Cons

1. The price has been volatile over time

However, the gold price has been so volatile over time that you can legitimately question its status as a safe haven investment, argued Patrick Connolly at Chase de Vere.

“From its peak in 1980 the price of gold fell by 65% in less than two and a half years – and it took more than 28 years for the 1980 peak to be reached again,” he said.

“This is a very volatile performance for a supposedly safe asset class,” he added.

2. Prominent investors don’t like gold

Schooling Latter at Chelsea Financial Services suggested gold was like Marmite: some love it and others hate it.

“It divides investors,” she said. “Warren Buffett sees no value in owning gold because he argues it will always underperform over the long term because it can’t compound over time.”

David Coombs, head of multi-asset investments at Rathbones, said gold was a “catastrophe insurance policy” for one-off events – that had only made money a handful of times.

3. It doesn’t produce income or interest

Gold doesn’t produce any income, interest or dividends. It just sits there. This means its price depends solely on demand and supply – and how much people are prepared to pay.

The idea is to buy it, tuck it away and hope someone will pay more for it in the future, according to Matthew Walne, managing director of Santorini Financial Planning.

“Fear or greed drives the price, rather than a quantifiable measure such as how much income it will produce,” he said. “By comparison, investments like property, shares and bonds generally provide income alongside an inherent capital value.”

4. You may already have exposure

Anyone with a diversified investment portfolio – particularly if multi-asset funds are part of the overall mix – then there is a chance that you’ll already have some gold.

If that’s the case then you need to decide whether that’s enough – or if you want to increase the amount of overall exposure, pointed out Connolly at Chase de Vere.

“Most investors will have some access to gold and other mining shares simply through holding a balanced and diversified portfolio of investment funds and don’t need to consider additional exposure to this asset class,” he said.

5. There are risks facing gold

No one knows for sure what the future holds. While it’s often held as a potential safeguard against international problems, there are also conditions in which it will struggle.

Connolly at Chase de Vere believes gold needs an economic backdrop with a weaker dollar, economic uncertainty, and geopolitical risk.

“The biggest risks for gold are likely to be a strong US Dollar, less demand from India, China and central banks and world peace, as gold is an asset that people turn to in a crisis,” he said.

Lastly, Kanda warned investors to seek out reputable suppliers. “Investing in gold is exciting and rewarding, but you need to ensure you are buying from reputable sellers," he said.

"Ensure you only look at secure and verified sites and analyse independent customer reviews before making any purchase decisions.”

Ready to invest but want to shield your returns from the taxman? Open a Stocks & Shares ISA with Hargreaves Lansdown now.

The information included in this article does not constitute regulated financial advice. You should seek independent, professional financial advice before making any investment decision.

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