Gold is one of the earliest traded assets, existing long before other markets like stocks and bonds. Gold offers lots of opportunities for gold investors and traders, but it is not without its downfalls. Join us while we cover why people invest in gold, how to invest in gold and review whether or not gold is a good investment in 2020.
Since the stock markets began, gold has gained a reputation to have a negative correlation to stocks and a positive correlation when compared to inflation. However, gold’s history as a financial asset and store of value began long before this.
Gold coins were minted and used as currency as far back as 550BC, but gold was known as a sign of wealth long before its use as a currency. Treasures containing gold have been discovered from as early as 4000BC, so the precious metal has been notorious for its relevance to power and wealth for many millennia.
However, it was not until the late 1800s when gold gained its value in contemporary finance. The majority of nations adopted the gold standard, which involves fixing the value of their currency to the price of gold. Since, the gold standard has been dropped and readopted in many countries until it was finally replaced by freely floating fiat currencies in 1971.
The price of gold remained relatively stagnant until the 2008 financial crisis, when the price of gold rose from around £15 to £30 a gram in the following years. This spike in price was in response to the adoption of quantitative easing (QE) by central banks. The justification of gold’s appreciation in value follows the general logic that QE creates inflation, and gold prices generally rise alongside inflation.
Investors choose to add gold to their portfolio for several reasons, these can include:
Compared to other commodities, gaining exposure to gold can be easy. Investors can choose to invest in gold with many investment products. It is also less volatile than certain commodities, such as oil trading or trading agricultural products that can be affected by seasonal events or economic instability.
A popular investment product for investors of all types is gold bullion. Gold bullion is the physical metal itself in a refined format suitable for trading and can appear as gold bars, ingots or coins. Investors can usually purchase these from a precious metals dealer, bank or brokerage on the internet or in person.
Additional to gold bullions, investors can choose to purchase gold jewellery or any other physical gold products. However, there is often a price mark-up on gold jewellery due to the labour involved and retail pricing of the product.
Physical gold cannot be stored as easily as other financial assets. It takes up lots of space and comes with the additional risk of loss or theft. When buying and storing physical gold of any sort, you should ensure that you have insurance that covers it in the case of loss or theft.
Another option is to purchase gold mining stocks, which are known to be riskier than physical gold. This is because you have to take into account a business’s success separate from the price of gold. However, additional to this, mining companies are typically a speculative investment, so you have the opportunity to make, or lose a lot of money. Nevertheless, you do not have the security of physically owning the gold if the gold stocks prove to be unsuccessful.
Owning physical gold comes with issues of storage, insurance and other costly fees and gold mining companies can be a speculative investment. It is no surprise, therefore, that Gold ETFs have proved as a popular way to gain exposure to gold, without the need to store it.
Gold ETFs offer exposure to the gold market as many ETFs track the movements of the commodity. Additional to this, ETFs can be considered a more liquid and less-costly investment compared to owning physical gold.
Gold derivatives represent any product that derives its price based on the value of gold. This can refer to gold options and futures, which are recommended for advanced traders. Derivative products can also include leveraged trading accounts, such as the spread betting or CFD trading accounts we offer, where you can trade on the value of gold via our online trading platform. If you are unaware, you can review the differences between a spread betting and CFD trading account, both of which can enable you to trade gold.
We also offer a Gold share basket that is made up of the top 15 stocks within the gold mining industry in the US. This includes Barrick, Franco-Nevada and Newmont. Basket trading helps to diversify your portfolio and the risk of one underperforming stock can be hedged by another within the collection.
As you do not own gold when using a gold derivative, it can be a more effective opportunity for short-term trading as opposed to long-term investing. Costs can be cheaper for the short-term but can rack up over longer periods.
You can open a trading account here to start trading on commodities such as gold and other precious metals. Otherwise, you can find out more about gold trading by visiting our how to trade gold guide.
Low-interest rates and financial uncertainty following the coronavirus market crash caused gold to enter a bull market, rising from just above £36 a gram to over £45 in May 2020. If financial uncertainty continues, most likely propelled by the weakening in economic growth following the pandemic, we could see gold hit new highs in 2020.
Gold can be a good investment asset to have as part of a balanced portfolio. Gold boasts some of the highest liquidity in the commodity markets and has more often than not increased in value over time.
If you were to invest £1,000 into gold 30 years ago, it has since then increased by over 500%. Meaning that your original investment could have been worth over £5,000. However, if we know anything about financial markets, it’s that past performance is not an indicator of future performance – although, an asset that has shown strong performance over many years could be preferred to one that hasn’t performed so well.
The price of gold since the coronavirus pandemic has further reinforced its utility as a hedge to the S&P 500. When the stock markets crashed, gold hit new highs not seen since 2012, with many analysts still predicting further gains. This is most likely a result of investors reallocating their wealth into gold, as it is known as a ‘safe haven’ and a hedge to stock markets and financial uncertainty.
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