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The price of gold has soared to an all-time high on a combination of geopolitical turmoil and hopes for interest rate cuts.
The price of the precious metal rose to $2,529.75 (£1,936.41) an ounce this week, up 22 percent since January.
Gold and US interest rates typically work in opposite directions: when gold goes up, rates go down, and vice versa.
All that glitters is gold: Gold price hits record high, rising to $2,529.75
However, this is not always the case, as gold also tends to rally during periods of volatile geopolitics or economic uncertainty, as we have experienced over the past two years.
The precious metal is often seen as an “insurance policy” asset that will perform well in times of market stress.
We look at whether now is a good time to invest in gold and how to gain exposure to it.
The recent performance of gold
Gold is typically expected to underperform in a high interest rate environment because it does not generate income for investors.
This makes it relatively unattractive when a decent return can be earned from lower-risk assets such as bonds and cash.
However, with the Federal Reserve considering cutting rates as early as September, gold has become a more attractive prospect.
At the same time, the weakening dollar is reducing its cost to buyers in other currencies.
Finally, gold is benefiting from its safe haven reputation at a time of heightened geopolitical uncertainty.
Why is gold an attractive investment?
The most important thing to keep in mind is that gold is not a shortcut to wealth, but rather a form of portfolio insurance, which should represent at most 5 to 10 percent of your total holdings, according to experts.
But gold has always been attractive to investors for several reasons.
The first is how it can act as a diversifier in a balanced portfolio.
It behaves differently than bonds and stocks and can offer you a smoother ride over time.
Last year, for example, ended more or less where it began, after some big ups and downs, and helped offset declines in stocks and bonds in 2022.
Laith Khalaf, head of investment research at stockbroker AJ Bell, said: “The precious metal’s value lies in its ability to act as a diversifier in a portfolio, because it behaves differently to other assets, especially stocks.”
Tom Stevenson of Fidelity International said: “Another reason to hold gold is its stability over long periods. Gold, valued as a store of value since ancient times, has tended to maintain its inflation-adjusted real value over time, although it can be extremely volatile in the short term.
“If you own gold, it’s a good idea not to keep too close an eye on the price because chances are that at some point, when your nerves get the better of you, you’ll be bailed out of your investment.”
Gold also tends to hold its value in times of stress: it is no coincidence that in the current uncertain times the world’s central banks are stockpiling gold.
One reason gold holds its value is its scarcity. Supply is also limited. The availability of new gold has barely increased in recent years, partly because the easy gold has already been mined.
However, none of this means that gold prices are not volatile. They are, and it is easy to rack up significant losses.
Khalaf said: ‘Between 1980 and 1982, the price of gold fell by more than 60 percent, and between 2011 and 2015, it fell by about 45 percent.’
How you can invest in gold
There are a few main ways to gain exposure to the precious metal.
Gold can be invested in through exchange-traded commodities (ETCs). Following the price of gold in this way is no different than holding a passive investment in a stock index.
These are publicly traded funds that offer investors exposure to the price of gold, backed by physical holdings of gold bullion held in secure vaults.
You can hold ETCs in a SIPP or ISA to protect profits from tax. Investors should be wary of ETFs that gain exposure through derivatives rather than physically holding the precious metal, as they are complex and may include costs that are not immediately apparent to the naked eye.
Khalaf said: ‘For exposure, investors might consider iShares Physical Gold ETC.’
While Hollands adds: ‘Our preferred ETC in this area is the Invesco Physical Gold, etc. GBX, which has a low annual fee of 0.12 percent and is backed by gold bullion stored in the London vaults of JP Morgan Chase Bank.
‘We have this in several of our portfolios already prepared.’
Brilliant gains: The price of the most valuable precious metal has reached an all-time high
Another way investors can gain exposure to gold is through multi-asset funds.
Holland likes it Personal Asset Trust PLCan investment trust managed by Troy Asset Management, which currently has 12 percent in gold-related investments (10.8 percent of this is in physical gold bullion).
It also has significant exposure to U.S. Treasury inflation-protected securities, stocks, short-term government bonds and cash.
Finally, you can gain exposure to gold by purchasing physical bullion or coins.
One way to do this is to physically purchase gold items, either to store at home (which will require sufficient security and insurance coverage) or to store in a secure vault, such as the Royal Mint, for a fee.
Certain gold bullion coin products issued by the Royal Mint have legal tender status and are therefore exempt from UK capital gains tax (as well as VAT).
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