Gold has been a symbol of conservative investing for centuries, offering financial stability and a notional safe haven in uncertain times. Whether through gold coins and bars or increasingly popular forms of investment such as gold ETFs (exchange-traded funds), shares in mining companies or CFDs, gold remains an attractive choice for investors seeking stability in today’s turbulent world.
Ways to invest in gold
Investment-grade gold can be bought in various ways, each with its own advantages and disadvantages. Before we examine the risks in more detail, let us briefly recap and summarise the options for investing in gold.
Physical gold
You can buy gold in the form of investment bars or coins. This allows you to literally hold your investment in your hands. This way of investing in gold is especially popular with people who prefer tangible reserves and want to retain direct control over their assets.
Gold ETFs
ETFs, or Exchange Traded Funds, track the price of gold by actively buying it for their shareholders. They allow you to invest in gold without having to arrange, for example, the transport or storage of your physical gold.
Shares in mining companies
Shares in major mining companies traded on US stock exchanges, such as Barrick Gold or Newmont Corporation, also follow the price of gold. In general, they tend to react to its movements in much the same way as a gold ETF. In some cases, however, the performance of the specific company also matters. This includes its profit, whether it has suffered any disruption and similar factors. It is therefore not always a 1:1 relationship with gold. Once again, however, you avoid any obligation to store gold somewhere yourself.
Gold CFDs
A CFD, or Contract for Difference, is essentially a financial product offered by the broker through which you invest. This CFD allows you to invest in gold, while the CFD follows its price. Again, you do not have to hold gold physically.
52% of retail investor accounts lose money when trading CFDs with this provider.
Risks of investing in gold
Many investors regard gold as a notional financial safe haven during financial or social crises such as war, unemployment and similar events. However, investing in gold also carries risks, which we will examine in more detail.
Gold price volatility
Gold is generally seen as a relatively stable investment. In certain periods, however, its price can be surprisingly volatile in the short term, meaning it can rise and fall sharply. For example, during a crisis, the price of gold often climbs to a new ATH (All-Time High), meaning new price highs. Once the situation in the markets calms down, however, the price can fall sharply.
For example, in 2020 the price of gold rose for most of the time. It can be said that it recorded a gradual increase throughout the year. If you had put your money into gold at the local peak in August 2020, the gold price then fell by roughly 10-15% over the following four months. You would therefore have been in the red. If you had held on, however, even gold bought at that peak would have appreciated by several tens of percent as of today. Put simply, volatility is treacherous in the short term. Over the long term, however, it can be offset by holding or by regular purchases.
Liquidity
With physical gold, it can be difficult in some situations to sell it quickly at the current market price. If, for example, you hold a gold bar and need cash, you may not find a buyer willing to pay that market price. And if you sell gold through a service, for example through a physical gold broker, that broker usually applies a certain margin, or “premium”, to such a sale.
From practical experience, I know that although physical gold brokers usually act properly and transparently, the price when selling or buying physical gold is typically 5-10% lower or higher than the market price, depending on whether you are selling or buying.
Fees and custody
Holding physical gold involves, among other things, the cost of storing it safely. That is assuming you do not want to keep your gold at home in a wardrobe drawer with your socks. You usually leave the gold in a safe deposit box at a bank or with another trustworthy provider.
Based on practical experience, gold ETFs tend to have annual costs of around 0.4% per year. With physical storage, the specific percentage depends on the ratio between the cost of custody and the value of your gold. In other words, this is because you pay for storage, for the box and so on. You usually pay a fixed amount, meaning the same sum regardless of whether you have one bar or dozens of bars stored.
Currency risk
When investing in gold in a foreign currency, most often the US dollar, it is important to take currency risk into account. Changes in the exchange rate between the dollar and pound sterling can significantly affect the sterling value of your investment. Even if the price of gold rises in dollars, a weakening dollar can reduce or completely erase that gain in pounds. For an investor, it is therefore crucial to follow not only the development of the gold price, but also exchange rate movements, which have a direct impact on the total return.
Psychological factors
Investing in gold often goes hand in hand with investor emotions. It is easy to give in to widespread panic or, conversely, to a “gold rush”, which can lead to poorly considered decisions. People also often talk about so-called FOMO, Fear of Missing Out. In other words, the fear that the train is leaving without you. That a good investment opportunity is slipping away. But what often happens is that you buy at the very top of the price.
So be careful. In the early days, I also invested in gold in response to media pressure. In other words, as a reaction to news reports. Later, as a long-term investor, I realised that purchases need to be planned, both for the long term and conscientiously. You should not panic during declines and should instead buy more.
Summary, or is gold a good investment?
Whether gold is a good investment can vary depending on your specific expectations and investment goals. In my view, it is clear that gold is still rising over the long term. Over the last several years, it has risen extremely strongly. If you are not interested in trading, but rather in long-term holding, then from a purely statistical point of view you are unlikely to make a mistake by buying gold and holding it.
From my own experience, I can say that investing in gold has helped me preserve the value of my funds over the long term, especially during periods of higher inflation. Of course, over the years I have also gone through various phases of market development, when the price of gold fluctuated, which is why I know how important patience is, along with being prepared for swings.
If you are looking for long-term protection against inflation or portfolio diversification, gold may be a very good choice for you. My own experience suggests that gold can perform its role as a “safe haven” well precisely during periods of economic uncertainty. However, it is important to realise that investing in gold also involves specific risks that may not be obvious at first glance. We have described these risks in more detail in this article.
I recommend that anyone considering an investment in gold carefully thinks through their true investment goal. I know how important it is to choose a form of investment that best matches your needs and your risk tolerance. Over the last five years, I have learned that the key to success is patience, consistent awareness and a readiness to face unfavourable market fluctuations as well. Before you enter the gold market, I recommend learning as much as possible about the different ways of holding and investing in it, and above all understanding its risks.