Gold prices have been climbing strongly in 2024 as investors, conscious of the effects of wars occurring in the Middle East and Ukraine, buy gold because of its reputation and stability. The spot price has risen more than 18% since mid-February.
Central banks' addition to their gold reserves to hedge against currency and other market risks has also driven the demand for gold.
Gold has been an attractive buy for investors for centuries thanks to its association with wealth and power. As a precious metal and a physical asset, it often attracts a certain confidence, which is sometimes misplaced.
Patchy performance
Day traders might be lucky enough at times to buy or sell gold for a decent profit by correctly guessing when to get in or out, however generally speaking, gold is only sometimes an easy investment.
Over the longer term, gold hasn’t always beaten inflation. The price can fluctuate even when market conditions suggest it should be rising, and its performance against stocks and bonds has been varied.
In fact, there have been long periods of consistently low prices. The price of gold declined for approximately six years from 1988 before recovering to then again declining for the decade leading up to the beginning of COVID-19 in 2020. The uncertainty of the pandemic helped reignite the buying of gold, increasing the price by almost 38%.
Pros and cons
When considering gold as part of your portfolio, as with any investment, there are pros and cons.
Like many other asset classes, gold can help diversify a portfolio and reduce certain risks. During stock market downturns, gold prices often (but not always) begin to rise. Some investors like the idea that it is a scarce, physical asset, and despite its ups and downs, gold has managed to hold its value over time.
At times, gold has provided good security against inflation. For example, in the US, between 1974 and 2008, there were eight years when inflation was high, and during those times, gold prices rose by an average of 14.9% annually. However, it’s important to understand that different periods incur different results. While US CPI growth was around 6.8% in 2021 and 2022, gold prices achieved an annual increase of just over 1%.
How to invest
To have a stake in a gold investment, you don’t need to carry home gold bars and hide them under your bed. Of course, it is possible to own gold bullion by buying online or in person from a registered gold dealer in Australia. The actual gold can be delivered to you or held in storage for a fee. You could also own physical gold by buying jewellery, although there are high markups, and resale value isn’t assured.
The ASX provides the avenue to buy shares in one or more of the many gold mining companies. You’ll need to do your homework carefully to consider the credentials of the companies. Some are riskier than others, depending on the countries they operate in and their size.
You could also consider exchange traded funds (ETFs) that are linked to or track the gold price. One advantage is provided by funds that hedge currency risk so that your returns won’t be affected by differences in the US dollar. However, as with any fund, you’ll need to factor in an annual management fee, which may reduce your ultimate return.
Next steps
At Nexia Australia, we have the local skills, national depth and global reach to provide you with in-depth insights into the gold investment sector.
Speak with your trusted local Nexia Adviser today to learn more about navigating gold investments and achieving a balanced portfolio.
