The gold price has surged to an all-time high of more than $2,000 an ounce during the Covid-19 pandemic, as worried investors pile into this ancient store of value. While many analysts believe it could climb even higher, you need to take their predictions with an ounce of salt
Although gold is seen as a safe haven in a crisis, the price can also be highly volatile. Instead of protecting your wealth, it could end up destroying it.
Crashing stock markets, falling bond yields and near-zero returns on cash have sparked a new gold rush. This isn't just a flash in the pan, the gold price has risen more than 600% since the start of the millennium. Gold has few industrial or practical uses. You can't spend it in the shops, for example.
Instead, the price is driven by sentiment. It typically rises during times of economic and political trouble, then falls when worries ease. It shot up in 1979, for example, after the Iranian revolution and Russian invasion of Afghanistan. Over the next two years its price dropped by half, and went nowhere for the next decade. Gold hit its previous peak of $1,837 during the Eurozone crisis in 2012, but fell more than 40 per cent as the crisis passed. In both cases, those who bought at the top of the market lost badly.
Gold still holds plenty of appeal and could rise higher from here. Governments and central bankers are fighting the pandemic with trillions of dollars worth of stimulus. By contrast, there is a finite supply of gold. You cannot just print it, as you can with paper money.
One downside of holding gold is that it does not pay any interest, but this is less of a problem today, when yields on rival safe havens bonds and cash are so low. However, gold could quickly lose its lustre if we find a vaccine for the coronavirus, and the world enjoys a V-shaped recovery.
Strike a balance
It makes sense to hold some gold, to offset the risks of investing in the stock market, say, through a pension or Stocks and Shares Isa. The gold price tends to rise when stock markets fall, and fall when they rise. This can help smooth out your returns. Most advisers say you should only hold around 5 or 10 per cent of your total portfolio in gold. You can tap into gold price growth by buying bars, coins or jewellery, but then face the added risk of theft or loss.
A much cheaper and simpler way to invest is through a low-cost exchange traded fund (ETF) such as iShares Physical Gold, which tracks the gold price. Alternatively, you can invest in the shares of gold miners. The BlackRock Gold & General Fund is also popular. While some exposure to gold makes sense do not be dazzled by its recent success. The gold price will not always glitter.
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