With Gold at Record Highs, Should You be Investing?

Gold is the universal language understood by all nations.” (George Herbert)

Just a few weeks ago, the gold price climbed above $2,500 per ounce for the first time in history. This has once again got South Africans talking about the attractiveness (or otherwise) of gold as an investment.

Gold is probably one of the easiest assets to understand. You can see it and touch it, and we all know that there is a limited supply and constant demand. That is why the gold price naturally appreciates over the long term.

But it’s also important to bear in mind that gold is not a foolproof investment. There are times – like now – when it makes impressive gains. But there have also been periods when it the opposite has been true. Between 2013 and 2019, for example, investing in gold would have lost you money.

It’s important to understand the pros and cons of investing in the precious metal, as this will help you to appreciate whether it should be part of your portfolio.

Pros of investing in gold

1. A safe haven during economic uncertaintyHistorically, gold prices have surged when financial markets have been in trouble, as investors seek stability. For example, after the 2008 financial crisis, gold prices soared from around $800 to over $1,900 per ounce within three years. This trend is visible again today, as gold has been attracting investors who are wary of other assets.
2. DiversificationGold tends to behave differently to other asset classes such as shares and bonds. That is why having a portion of gold in your portfolio can help to manage risk, particularly when other assets are performing poorly.
3. LiquidityGold can be easily bought and sold in global markets. This liquidity ensures that you can quickly convert your gold holdings into cash when needed, which provides flexibility in your portfolio.
4. Long-term valueGold has historically preserved its value over long periods. Its ability to retain its worth through various economic cycles makes it a reliable store of wealth, even across centuries.

Cons of investing in gold

1. It doesn’t produce incomeOne significant drawback of gold is that, unlike stocks that pay dividends or bonds that give you interest, gold does not provide a regular cash flow. This can be a disadvantage as it does not produce any inherent compounding effect.
2. VolatilityAlthough it has grown steadily over very long periods of time, the gold price can fluctuate a lot in the short term. That is because it can be heavily affected by market sentiment and speculative activity.
3. Storage and insurance costsIf you own physical gold, you need to store it somewhere and that comes at a cost. Insuring it against theft or loss adds another layer of expense. These costs can erode your overall return.
4. Opportunity costIt’s always important to remember that if you are allocating substantial funds to gold, you might be missing out on potentially higher returns from other asset classes. Despite gold’s solid long-term record, it has underperformed the stock market over the last 100 years.

Should you invest in gold?

Any investor needs to take all of these pros and cons into account when deciding whether to allocate some of their money to gold. While it’s not for everybody, for many people it does make sense to have somewhere between 5% and 15% of your portfolio allocated to gold.

Three ways to invest in gold

1. Physical goldAnyone can invest in physical gold by buying Krugerrands or other gold coins. While many prefer this tangible ownership, it does require secure storage and insurance. There are countless stories of people who lost Krugerrands or had them stolen, so don’t just take physical ownership for granted.
2. Exchange-traded funds (ETFs)Gold-backed ETFs allow you to invest directly in the metal without having to hold it physically yourself. These funds invest in gold bullion and give you the exact return of the gold price, providing an easy way to invest without the hassle of storage.
3. Shares in gold mining companiesGold shares have long been a big part of the South African market, and it’s important to consider that if you have any local equity exposure you probably already have some gold shares in there. Always bear this in mind when thinking about your total gold exposure. Also consider that shares in gold mining companies can potentially offer higher returns, but they also come with higher risk.

All that glitters

Investing in gold offers numerous benefits, including protection against inflation, a safe haven during economic uncertainty, and diversification. However, it also comes with drawbacks such as lack of income, volatility, and additional costs.

By exploring the various ways of investing in gold and carefully considering the pros and cons, South African investors can make informed decisions about incorporating gold into their investment portfolios. As always, its best to consult with your financial advisor to tailor investments to your individual goals and risk tolerance.

Copyrights: FinDotNews