Is gold worth its weight for investors?

12/10/2020

The price of gold reached an all-time high in the summer of 2020. On 5 August, gold bullion broke the US$2,000 per troy ounce mark, having risen 39% from its 2020 low on 19 March.

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This may be surprising to some given the global stockmarket surge since March. Historically, the prices of gold and shares have tended to move in opposite directions. Gold is usually seen as a “safe haven” asset in economic downturns, when stocks tend to fall.

Here, we take a closer look at why gold prices have risen and what investors should keep in mind.

Why has the gold price been rising?

With the global economy in turmoil from the impact of the coronavirus pandemic, demand for this “safe haven” asset has risen in many quarters, pushing up the market price.

At times of acute uncertainty about the future, many investors seek shelter from risk assets such as stocks and bonds. Being a physical asset, gold has been considered a reliable form of global currency for centuries. Its scarcity is also seen to denote universal value.

The increase in price has been exacerbated by the falling value of the US dollar during the summer of 2020. With the dollar worth less, the price of gold – which is denominated in US dollars – has naturally risen. For this reason, gold tends to move in the opposite direction to the US dollar.

Should we always ‘believe in gold’?

Although gold has risen to record highs, investors considering the precious metal as a store of wealth should not think it comes without risk.

The price of gold has historically been volatile. Speculation can play a big role in driving the global price, meaning it can go up and down sharply at times. Over the years, people have lost fortunes betting on gold continuing to rise, only for it to turn in the wrong direction.

Unlike other financial assets, like bonds and company shares, the price of gold is not driven by fundamental qualities like the income it can deliver. Gold, of course, does not provide investors with an income stream – there are no dividends or interest payments.

Proponents of gold as an investment might argue that there is an inherent scarcity value to gold, that can drive up its long-term value. While there might only be so much gold left to mine in the world, it is worth remembering that it can be reused and recycled. There are many factors beyond investors’ control, including whether demand for gold jewellery rises or falls, that will drive its long-term price.

Remembering the golden rule

When putting money to work for our futures, it is always worth remembering not to rely too much on any single type of investment.

Tempting as it can be to chase assets that have been performing well, investors should beware of being dazzled by rapid gains. This might be especially true of the yellow metal, whose price can be particularly volatile. After hitting record levels in August, gold fell by 7% in September.

This demonstrates the need to diversify when it comes to your investments. While there could be a place for commodities like gold in a portfolio, it might be unwise to go all in on gold, particularly when it will never provide you with an income.

Sometimes, all that glitters is not gold.

Please bear in mind that M&G is unable to give financial advice. The views expressed here should not be taken as a recommendation, advice or forecast.

When you're deciding how to invest, it's important to remember that the value of investments will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.