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Is gold a good investment?

Gold is one of the earliest traded assets, existing long before other markets like stocks and bonds. Gold trading offers lots of opportunities for investors, 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 2021.

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History of gold investment

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.

Why invest in gold?

Wealth preservation. Gold and has been trusted by many investors for its wealth preservation qualities. Consider the comparison between owning £50 worth of gold in 1980 and owning a £50 note. Gold has since gone up in value, so the value of the gold far proceeds the original £50 investment. However, the £50 note has not increased in value and due to inflation, cannot buy as much as it could have in 1980.
Hedge. Gold prices often appreciate alongside rising inflations rates and a depreciating dollar. For this reason, investors may look to buy gold as a hedging asset when they realise they are losing money. This follows the general logic that gold often maintains its value or even appreciates when the value of the dollar falls. Read more about forex hedging.
Safe haven. Unlike currencies, gold is not directly impacted by interest rate decisions and cannot be printed to control its supply and demand. Gold is a scarce asset that has maintained its value over time and has proven its worth to act as an insurance policy during adverse economic events. Because of this, gold is considered a safe haven by many investors.
Portfolio diversification. A balanced portfolio will often include diversification assets like gold as they are commonly negatively correlated to the stock market. Having a diverse investment portfolio helps to reduce risk and volatility for investors.
Gold stock opportunities. The values of gold stocks are usually partially reflected by the price movements of the precious metal, gold. However, gold stocks can maintain their profitability even when the price of gold is low. Additionally, many gold mining companies pay strong dividends, which can help provide further incentive for investors to buy gold stocks instead of gold. See a list of the top gold stocks and ETFs to watch.

Gold investment products

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.

Gold bullion and physical gold

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 bullion, 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. View our gold price chart for more information on trading physical gold.

Gold mining companies

Another option is to purchase gold mining shares, 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.

Gold ETFs

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.

Exchange-traded funds 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

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 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.

Gold market outlook for 2021

Low-interest rates and financial uncertainty following the Covid-19 market crash caused gold to enter a bull market, rising from just above £36 a gram to over £45 last year. If financial uncertainty continues, most likely propelled by the weakening in economic growth following the pandemic, we could see gold hit new highs in 2021.

Is gold a good investment now?

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.

Coronavirus and gold's price

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.

Key takeaways

Investors gain exposure to gold for many reasons. However, investors choose gold, namely as a safe haven, hedging asset or to diversify their portfolios. Gold has several reasons to be used as an investment asset and is often chosen for a mix of these.
There are many ways to invest in gold. However, there is no 'best' method as the tool you should choose depends on your personal circumstances and investment aims.
Gold is a good investment in the right circumstances. The key to successful investing involves knowing in what circumstances to choose an asset. Therefore, gold can be a good investment but it can heavily depend on your personal circumstances and the asset's suitability to your portfolio.
Gold is not without its risks. Like all financial assets, investing in and trading on gold comes with risks of losing capital. You should only invest in, or trade gold if you are educated on the risks associated with doing so. Read our article on the gold/silver ratio to learn how the price of gold has changed over the years and how gold traders use it to modify their holdings when the ratio fluctuates.

Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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