“Gold is the universal language understood by all nations.” (George Herbert)
Just a few weeks ago, the gold price climbed above $2,500 per ounce for the first time in history. This has once again got South Africans talking about the attractiveness (or otherwise) of gold as an investment.
Gold is probably one of the easiest assets to understand. You can see it and touch it, and we all know that there is a limited supply and constant demand. That is why the gold price naturally appreciates over the long term.
But it’s also important to bear in mind that gold is not a foolproof investment. There are times – like now – when it makes impressive gains. But there have also been periods when it the opposite has been true. Between 2013 and 2019, for example, investing in gold would have lost you money.
It’s important to understand the pros and cons of investing in the precious metal, as this will help you to appreciate whether it should be part of your portfolio.
Pros of investing in gold
A safe haven during economic uncertainty
Historically, gold prices have surged when financial markets have been in trouble, as investors seek stability. For example, after the 2008 financial crisis, gold prices soared from around $800 to over $1,900 per ounce within three years. This trend is visible again today, as gold has been attracting investors who are wary of other assets.
Diversification
Gold tends to behave differently to other asset classes such as shares and bonds. That is why having a portion of gold in your portfolio can help to manage risk, particularly when other assets are performing poorly.
Liquidity
Gold can be easily bought and sold in global markets. This liquidity ensures that you can quickly convert your gold holdings into cash when needed, which provides flexibility in your portfolio.
Long-term value
Gold has historically preserved its value over long periods. Its ability to retain its worth through various economic cycles makes it a reliable store of wealth, even across centuries.
Cons of investing in gold
It doesn’t produce income
One significant drawback of gold is that, unlike stocks that pay dividends or bonds that give you interest, gold does not provide a regular cash flow. This can be a disadvantage as it does not produce any inherent compounding effect.
Volatility
Although it has grown steadily over very long periods of time, the gold price can fluctuate a lot in the short term. That is because it can be heavily affected by market sentiment and speculative activity.
Storage and insurance costs
If you own physical gold, you need to store it somewhere and that comes at a cost. Insuring it against theft or loss adds another layer of expense. These costs can erode your overall return.
Opportunity cost
It’s always important to remember that if you are allocating substantial funds to gold, you might be missing out on potentially higher returns from other asset classes. Despite gold’s solid long-term record, it has underperformed the stock market over the last 100 years.
Should you invest in gold?
Any investor needs to take all of these pros and cons into account when deciding whether to allocate some of their money to gold. While it’s not for everybody, for many people it does make sense to have somewhere between 5% and 15% of your portfolio allocated to gold.
Three ways to invest in gold
Physical gold
Anyone can invest in physical gold by buying Krugerrands or other gold coins. While many prefer this tangible ownership, it does require secure storage and insurance. There are countless stories of people who lost Krugerrands or had them stolen, so don’t just take physical ownership for granted.
Exchange-traded funds (ETFs)
Gold-backed ETFs allow you to invest directly in the metal without having to hold it physically yourself. These funds invest in gold bullion and give you the exact return of the gold price, providing an easy way to invest without the hassle of storage.
Shares in gold mining companies
Gold shares have long been a big part of the South African market, and it’s important to consider that if you have any local equity exposure you probably already have some gold shares in there. Always bear this in mind when thinking about your total gold exposure. Also consider that shares in gold mining companies can potentially offer higher returns, but they also come with higher risk.
All that glitters
Investing in gold offers numerous benefits, including protection against inflation, a safe haven during economic uncertainty, and diversification. However, it also comes with drawbacks such as lack of income, volatility, and additional costs.
By exploring the various ways of investing in gold and carefully considering the pros and cons, South African investors can make informed decisions about incorporating gold into their investment portfolios. As always, its best to consult with your financial advisor to tailor investments to your individual goals and risk tolerance.
To discuss whether an investment in gold makes sense for you, speak to us.
Complete Your Financial Plan
Sign Up To Our Mailing List
November 4 - Market Update: Reasons for SA Investors to Be Hopeful?November 3 - Evolving Wealth Part 1: Gen Z, Trailblazers of the Digital Investment EraNovember 2 - Why the Rand Shouldn’t Be Your Main Reason for Investing OffshoreNovember 1 - 6 Winning Strategies That Top Investors and Elite Endurance Athletes ShareOctober 4 - Market Update | US Election Is Too Close To Call, so Expect Market VolatilityOctober 3 - How Rand-Cost Averaging Could Help YouOctober 2 - From Vows to Verdicts: What Happens to Your Will After Divorce?October 1 - With Gold at Record Highs, Should You be Investing?September 4 - Market Update: Christmas in September if Rates Come Down as ExpectedSeptember 3 - Why You Should Keep Your Investment Strategy to YourselfSeptember 2 - Aligning Your “Wheel of Life” – A Beginner’s GuideSeptember 1 - The Big Question: Should You Buy a Home or Rent One?August 4 - Market Update: Magnificent Seven Lose Their Magnificence in JulyAugust 3 - Unsung Heroes of Insurance: Four Types That Could Save You MoneyAugust 2 - Do You Recognise Yourself in Any of These Client Case Studies?August 1 - Three Pot System 101: What You Need to Know Before 1 SeptemberJuly 4 - Market Update: Financial Markets Welcome GNU 2.0 and New CabinetJuly 3 - Busting the Post-Retirement JargonJuly 2 - Safeguard Your Money: Look out for Phishing ScamsJuly 1 - Why the Marshmallow Effect Could Derail Your Retirement PlansJune 4 - Why Emotions and Investing Don’t Always MixJune 3 - Demystifying Retirement Planning LingoJune 2 - The Sandwich Generation: How Can You Deal with Family Always Asking You for Money?June 1 - How the Elections May Impact Markets in the Months AheadMay 4 - Market Update: Geopolitical and Economic Risks are on the Rise and Investors are ConcernedMay 3 - Need to Know: Annualised Returns Versus Internal Rates of ReturnMay 2 - Investment Jargon 101: Your One-Stop PrimerMay 1 - Do You and Your Partner Share the Same Money Values?April 4 - Market Update : Will They, Won’t They? The Case for Lower Interest Rates Improved in March.April 3 - Unpacking Diversification: What Really Counts?April 2 - Zen and the Art of Financial PlanningApril 1 - The Secret to Solving the Financial Rubik’s Cube? Consistency.March 4 - Market Update: Initial Investor Vote of Confidence Dissipates in Wake of BudgetMarch 3 - The Most Important Part of a Financial Plan: Room for ErrorMarch 2 - Diversification: Free Lunch or Fool’s Gold?March 1 - Budget 2024: What it means for youFebruary 5 - Budget 2024: The Minister of Finance Wants to Hear from You!February 4 - Market Update: US and SA Markets Diverge on Differing Investor SentimentFebruary 3 - Tax Tip: Must-Do Top Ups in FebruaryFebruary 2 - Should Investing Be This Sexy?February 1 - Is There Really Much Difference Between Investing and Gambling?January 4 - Market Update: What Lies Ahead for 2024?January 3 - Think You’re a Rational Investor? Think AgainJanuary 2 - Did 2017 Change the Way You Invest?January 1 - How to Avoid Getting Burnt by the Next Investment Bubble in 2024
December 4 - Stock Markets Break Three-Month Losing StreakDecember 3 - The Differences Between Life and Living AnnuitiesDecember 2 - Should you be an Optimist or a Pessimist With Your Money?December 1 - How to Give Meaningful Gifts This Festive SeasonNovember 4 - Market Update: The Effects of War, Higher Interest Rates and China on EquitiesNovember 3 - Why do People Invest in Property?November 2 - Retirement Planning: The ins and Outs of Nominating BeneficiariesNovember 1 - Retiring Well is About More Than MoneyOctober 4 - Why Your Marital Contract Really MattersOctober 3 - How to Avoid Being Scammed by Email FraudstersOctober 2 - The Stock Market Indices to Watch When Monitoring Equity PerformanceOctober 1 - Why do Some People Have a Problem Spending Money?September 4 - The Difference Between Being Rich and Being WealthySeptember 3 - The Ins and Outs of Buying Offshore PropertySeptember 2 - A Good Budget Doesn’t Limit Spending, it Prioritises itSeptember 1 - Should you pay off your home loan?August 4 - How to Take Advantage of the Donations Tax AllowanceAugust 3 - Five Reasons why a Financial Windfall Must be Managed CarefullyAugust 2 - What’s Cooking with the Three-Pot System?August 1 - Make Sure Your Family is Financially Prepared for When You Pass AwayJuly 4 - A Must-Have for Couples who Choose not to Tie the KnotJuly 3 - Can Gratitude Make you Feel Better About Your Money?July 2 - Four Ways to Make the Most of RetirementJuly 1 - How to Invest When There’s So Much Bad NewsJune 4 - The Ins and Outs of Compulsory AnnuitiesJune 3 - Who is Influencing Your Financial Decisions?June 2 - R is for RebalancingJune 1 - Don’t let Money Ruin Your RelationshipMay 4 - Five Ways to Teach Kids About MoneyMay 3 - Much Ado About RiskMay 2 - Living Wills: A Must Have, Despite the Grey AreasMay 1 - What is True Wealth?April 4 - How the 2023 Budget Will Impact Your PocketApril 3 - Three Financial Imperatives for Women in DivorceApril 2 - Should You Ask ChatGPT for Financial Advice?April 1 - Compound Interest: The Eighth Wonder of the WorldMarch 4 - How a ‘Safe’ Fixed Deposit Might Still be RiskyMarch 3 - Thinking of moving to Australia? Bear these numbers in mindMarch 2 - Avoid These 6 Barriers to Wealth CreationMarch 1 - How Good do You Think You Are at Investing?February 4 - Is Money Stress Taking a Toll on You?February 3 - Why an Endowment is One of the Best Ways to Invest OffshoreFebruary 2 - Why too Much of a Good Thing Can be a Bad ThingFebruary 1 - Invest With FIRE and Never Look BackJanuary 4 - Why Lottery Winners End up Broke: The Importance of Your Financial ContextJanuary 3 - Discover the Freedom of a Tidy PortfolioJanuary 2 - Why You Absolutely Should be Investing in EducationJanuary 1 - Four Simple Steps to Start the Year on the Right Financial Foot
December 4 - What is This Volatility Risk People are Always Talking About?December 3 - Why You Need to Watch Out for The Butterfly EffectDecember 2 - 6 Ways to Achieve Financial FreedomDecember 1 - Three Books for the HolidaysNovember 4 - The Question of LoyaltyNovember 3 - Why do we Even Have Bull and Bear Markets?November 2 - Should I Buy a Holiday House?November 1 - Put Stocks, Rather Than Socks, Under the Tree This ChristmasOctober 4 - Can You Take Out Life Insurance on Someone Else?October 3 - Loss Aversion and Lifestyle Creep – How Behaviour Influences SavingOctober 2 - Why Timing Might be Everything in Retirement – Especially in a Bear MarketOctober 1 - Get Rich - Stay Rich Eight Mistakes Wealthy People Never MakeSeptember 4 - Capital Gains Tax: 10 Common Questions AnsweredSeptember 3 - The Risk That Many Investors Don’t Think AboutSeptember 2 - Much Ado About Regulation 28 and the Private InvestorSeptember 1 - The “Two Bucket” Retirement Savings System: What is it and Why is it Important?August 4 - Retirement Planning for Age-Gap CouplesAugust 3 - A Simple “50-15-5” Budget Hack for Women (and Men!)August 2 - Does Your Family Need a Constitution?August 1 - Women’s Month: Three Ways You Can Improve Your Money HealthJuly 4 - Five Things to Check When a Loved One Passes AwayJuly 3 - Rules of Financial Planning For a Special-Needs ChildJuly 2 - Why Your Financial Plan Should Cater For Possible DementiaJuly 1 - Why Inflation is the Most Important Investment BenchmarkJune 4 - How Relevant Is The 4% Rule of Thumb These Days?June 3 - Why You Should Treat Your Finances Like Your HealthJune 2 - Is Your Business Good Retirement Capital?June 1 - With the Limits Raised, How Much Should You Invest Offshore?May 5 - Quote of the Month: Challenging the Rejection of an Insurance ClaimMay 4 - Financial Products: The Less You Understand, the More You PayMay 3 - The Miracle of Investment Debit OrdersMay 2 - Five Things to Think About as Interest Rates RiseMay 1 - Stay Calm When the Bear ProwlsApril 5 - Quotes of the Month – The War in UkraineApril 4 - Smart Ways to Give: During and After Your LifetimeApril 3 - Take These Three Steps to Break the Money Shame SpiralApril 2 - When Things Don’t Go According To (The Financial) PlanApril 1 - What Amazon and Ford Can Tell Us About DiversificationMarch 4 - Quotes of the month – What the NFT?March 3 - How to Avoid Losing Your Life’s Savings to a “Tinder Swindler”March 2 - The Different Ways to Invest: What Does It All Mean?March 1 - Three Reasons You Shouldn’t Wait to Talk to Your Kids About MoneyFebruary 6 - Quote of the Month – Don’t Cash In Your Retirement SavingsFebruary 5 - Should You Top Up Your Retirement Annuities Now?February 4 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial DistressFebruary 3 - Don’t Let Delays in the Master’s Office Leave Your Family in Financial DistressFebruary 2 - Three Reasons an Insurer Could Cancel Your PolicyFebruary 1 - Investing: Men and Women See Things DifferentlyJanuary 4 - Quote of the month – Stay invested!January 3 - What SARS Says About Crypto Assets and TaxJanuary 2 - Three Ways to Leave a Legacy, And Not Just an EstateJanuary 1 - Red-Carding the Myth of The Rational Investor