With asset markets having been so turbulent over the past couple of years, it’s understandable that some investors may be pondering whether other options might be able to offer them higher returns and a smoother ride.
One of those options is more established than any stock or bond market, prized by mankind for as long back as the records go: gold.
So how does gold stack up against conventional listed investments? Should investors leave stock markets behind and go ‘all in’ on bars and coins? Read on to learn more about the investment characteristics of the yellow metal.
- Despite its perception as a safe haven, the price of gold is typically very volatile – more so than the stock market. Over the past 15 years, gold has an annualised volatility of 16.2% compared with 15.2% from the MSCI All Country World Index of shares[1].
- Worse, movements in the gold price can be unpredictable in that it is often unclear what is driving its price up or down.
- On that same front, the conventional idea of gold is that its ‘unique selling point’ is as definitive protection against inflation. However, correlation data shows that gold has actually has a very marginal negative relationship with UK inflation over the past 15 years[2]. That means that on average, when prices have increased, the gold price has tended to fall slightly.
[1]FE Analytics as at 30 November 2023. ‘Gold’ refers to the S&P GSCI Gold Spot index
[2] FE Analytics. ‘UK inflation’ refers to the UK Consumer Price Index
- All of that said, gold does tend to work as a long-term store of wealth. With returns of 169.2%, it has handily remained ahead of UK inflation (+53.9%), cash (+12.5%) and global bonds (+46.7%) over the past 15 years[3]…
- … though it has done less than half as well as the global stock market (+453.3%) over that timeframe[4]. Keep in mind too that the past 15 years have taken in any number of challenging events when one might have expected gold to shine: the financial crisis of 2008-09, the US credit rating downgrade, the Eurozone debt crisis, Brexit, the US-China trade war, COVID, the war in Ukraine and so on.
- Gold doesn’t really do anything. Owning shares gives one a stake in growing corporate earnings which will hopefully grow over time; in human ingenuity and ideas; in the future. Though pretty, gold doesn’t offer any of that. Further, at a time when financial assets offer high yields, it is worth bearing in mind that gold does not pay any interest or dividends either.
- Accessing gold can be difficult for retail investors. There are no open-ended funds (the most common type in the UK) which are dedicated to investing in the metal. This leaves three options:
- buying an exchange-traded fund holding gold. These can incur hefty trading costs on some platforms;
- buying an open-ended fund investing in the shares of gold mining companies. These are often extremely volatile and are subject to influence from corporate and stock market factors, in addition to those relating gold itself; or
- buying physical bars or coins to store at home, which is a considerable security risk. Alternatively, if comprehensive security equipment is purchased to secure the assets, this would effectively represent a kind of ‘negative interest rate’ in terms of lost costs.
This is provided, of course, that the potential drawbacks are fully acknowledged and understood by investors too.
[3] All figures from FE Analytics as at 30 November 2023. Gross returns with income reinvested, where applicable. ‘Cash’ refers to Bank Rate. ‘Global bonds’ refers to the Bloomberg Global Aggregate index hedged to Sterling
[4] FE Analytics as at 30 November 2023. Gross returns with income reinvested, where applicable. ‘Global stock market’ refers to the MSCI All Country World Index
