Gold, revered for millennia, has captivated humanity with its allure, adaptability, and its longstanding reputation as a secure refuge. From gleaming bullion bars to shares in mining enterprises and exchange-traded funds (ETFs), there exists a plethora of avenues to delve into the world of gold investment.
Yet, one may ponder—has gold historically proven to be a prudent investment? CNBC Pro delves into the intricacies, weighing the merits and drawbacks of gold investment, exploring the various channels to deploy capital, and scrutinizing the inherent risks involved.
“Gold is undeniably a thing of beauty—there’s a certain satisfaction in possessing it,” remarked Tom Price, a research analyst at Panmure Liberum, during a video dialogue with CNBC.
Unlike its precious metal counterparts, gold resists oxidation and maintains its stability at ambient temperature, Price noted. Its intrinsic properties remain consistent irrespective of the location of extraction. “Portable, divisible, fungible, and remarkably stable—these qualities are almost emblematic of an archaic currency, which is why gold endures as a store of value.”
Recently, gold prices have embarked on a remarkable ascent, appreciating by 13% in 2023 and surging over 17% year-to-date as of mid-July. This rally has been fueled by escalating geopolitical tensions, a surge in central bank purchases, and anticipations of interest rate reductions in the United States. At the time of writing, spot prices in New York hovered around $2,465 per ounce, with analysts projecting further upward momentum. Strategists at Bank of America and Citi have forecasted that gold could reach the $3,000 per ounce mark within the next 18 months.
A ‘Refuge of Value’
Gold’s role as a “store of value” becomes particularly pronounced in the eyes of many investors during periods of market turbulence. According to UBS, it serves as an “effective hedge against concerns of geopolitical division, inflation, or ballooning deficits,” while Berenberg underscores that gold remains “a favored asset in volatile markets.”
For those with a long-term investment horizon, “Why not hold some gold?” queries Robin Bhar, an independent commodities consultant, during a conversation with CNBC. “The future, 15 to 20 years from now, is uncertain. Holding some gold might yield dividends—or it might not.”
Since gold is often denominated in U.S. dollars, it tends to exhibit an inverse correlation with the currency (though this is not always true). As for inflation, the World Gold Council notes that gold’s gains have outpaced consumer price indices since the 1970s. “During years when inflation ranged between 2%-5%, gold’s price ascended by an average of 8% annually,” the industry trade association stated on its website.
According to Amy Arnott, a portfolio strategist at Morningstar, as a hedge against long-term inflation, gold has performed admirably. However, its short-term track record is more “varied,” she acknowledged, citing historical fluctuations.
“Gold excelled during the high inflationary period of the 1970s, driven by soaring oil prices and a rapidly expanding monetary base, which pushed inflation to unprecedented levels in the United States. But in other eras, such as the early 1980s and 1988-91, it actually yielded negative total returns, on average, and significantly underperformed large-cap stocks,” she explained in an email to CNBC.
Some investors argue that other assets, such as Treasury inflation-protected securities, offer more effective protection against inflationary pressures.
During certain crises, investors might witness a decline in gold prices, according to John Meyer, head of research at the corporate finance firm SP Angel. However, he noted, gold prices “typically recover faster than other investments, providing a higher degree of protection compared to many other instruments.”
Investing in Gold
Market experts consulted by CNBC Pro suggest that investors consider allocating around 2% of their portfolio to gold, with an option to increase this percentage depending on one’s global outlook. Generally, between 5% and 10% is recommended as the upper limit for gold allocation, with many viewing it as a critical tool for portfolio diversification.
There are several pathways to gain exposure to gold, including direct ownership of the physical metal, investing in gold-related equities such as mining companies, or opting for exchange-traded funds (ETFs).
Owning gold coins or bars carries a certain prestige for some, and there are distinct advantages to purchasing the physical metal, particularly for those apprehensive about geopolitical instability and economic uncertainties, Price observed. For some investors, “the priority is to own the actual metal, driven by concerns like inflation protection or extreme scenario planning.”
However, there are often significant tax considerations to account for.
In the U.K., investors benefit from an exemption on capital gains tax for bullion coins from the Royal Mint, as well as relief from value-added tax (typically 20%). Conversely, in the U.S., gold is classified as a collectible, with both physical gold and ETFs subject to up to 28% capital gains tax.
Gold ETFs
For those who prefer not to physically store gold bullion, investing in an ETF that holds physical gold offers a viable alternative. “It’s quite straightforward,” explained Colin Hamilton, a commodities analyst at BMO Capital Markets. “You own the physical metal, but it’s not in your possession,” he elaborated during a video call with CNBC.
Gold Mining ETFs
Investing in gold mining ETFs—funds that hold shares in multiple gold mining companies—provides another route to gold exposure. Meyer described ETFs backed by major banks as “relatively safe” in an email to CNBC.
Among the world’s leading ETFs are the VanEck Gold Miners ETF and the VanEck Junior Gold Miners ETF, which invests in smaller companies involved in exploration. Other top contenders include the iShares Gold Producers UCITS ETF USD, VanEck Gold Miners UCITS ETF Accum A USD, and iShares S&P/TSX Global Gold Index ETF.
Individual Stocks
For those interested in single-stock investments, Meyer expressed confidence in Barrick Gold and Newmont Mining, predicting their continued performance. He also highlighted British firms such as Resolute Mining, Centamin, Hochschild Mining, and Caledonia Mining as notable picks. Panmure Liberum, meanwhile, maintains buy ratings on Caledonia Mining, which operates in Zimbabwe, and London-based Endeavour Mining, which manages gold mines in West Africa. Endeavour also receives a buy rating from Berenberg analysts, alongside Pan African Resources.
Gold Equities or Physical Gold?
Investing in gold mining ETFs and stocks provides exposure to gold prices, with share prices often rising in tandem with the metal, though they are not as directly tied to the metal’s price fluctuations. However, Price cautioned that this can have its downsides, as gold-related equities are “notoriously” prone to underperforming the metal’s price itself. “Although gold equities react to changes in the gold price, the extent of that reaction has diminished over time,” he said, noting that the risks and costs of gold extraction can weigh on mining companies.
George Milling-Stanley, chief gold strategist at State Street Global Advisors, which manages the SPDR Gold Shares ETF, concurs.
“One of the reasons I hold gold bars is that I believe they provide some protection against potential downturns in the equity market,” he told CNBC earlier this year. “When the stock market declines, gold mining stocks often remember they are equities too and tend to fall alongside the broader market. So, they don’t offer that additional layer of protection.”
Risks
Despite its reputation as a haven, investing in gold is not without risks. Prices can be volatile, influenced by breaking news and shifts in the physical market, such as supply and demand dynamics.
Investors should also consider whether other assets might offer superior returns over the long term. Over the past five years, for example, gold delivered a return of 10.59%, compared to a 15.05% return for the S&P 500 stock market index, according to Morningstar Direct. This is “significantly above” the long-term average, noted Morningstar’s Arnott. Over the past 50 years, gold has returned 5.72%, compared to the S&P 500’s 11.75%.
Another drawback of physical gold is that it does not generate interest or dividends, unlike many other asset classes such as stocks and bonds.
When asked if investing in gold is worthwhile, Bhar acknowledged that it’s a “difficult” question to answer but concluded, “If we strip it down to basics, the answer has to be ‘yes.’”
“If you’re even slightly risk-averse, or bearish on the global outlook, we would still advise people to hold a small amount of gold in their portfolio, as it offers protection in extreme scenarios,” Price added. “Even after conflicts are resolved… gold remains a solid place to invest.”
