Stock markets are tumbling with the FTSE 100, FTSE 250, and All-Share indexes all sliding by over 6% since the week began. Russia’s ongoing war on Ukraine, as well as concerns surrounding inflation and interest rate rises are clearly spooking investors.
One asset that traditionally does well during times of uncertainty is gold. The price of the precious metal has surged since the start of the year.
So, how can you invest in gold? Let’s take a look.
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What’s happened to the gold price in 2022?
It’s fair to say that gold disappointed last year. Its value actually fell in 2021, despite a number of economies reporting a surge of inflation, particularly towards the end of the year.
However, gold has started 2022 very well indeed. In January, the gold price stood at $1,829 (£1,376.17) per troy ounce. By mid-February it started to climb, hitting $1,871 on Valentine’s Day.
On 24 February, when Russia invaded Ukraine, the price surged to $1,961 per troy ounce. Despite a few ups and downs since then, gold sat at $1,944 on Friday 4 March.
To look at it another way, since the beginning of the week, gold’s price has risen 2.09%. Compare this to drops in excess of 6% in the value of the popular FTSE share indexes and it’s clear to see that many investors are putting their faith in the precious metal amid the current economic uncertainty.
Why do investors traditionally turn to gold during times of uncertainty?
Gold doesn’t pay any regular dividends. Nor is it something you can live in or get much tangible benefit from unless it’s in the form of jewellery.
Despite this, gold is often seen as a safe haven for those looking to hold on to the value of their wealth. That’s because it’s an asset that is difficult to get hold of. For example, gold is difficult to find and expensive to mine.
Compare this to fiat currency, which can be freely created by central banks. In addition, fiat currency will always lose its value during periods of inflation unless it’s stored in a savings account paying an interest rate above the rate of inflation. Right now, keeping up with inflation is simply impossible given the poor savings rates on offer. Currently, the best easy-access rate you can hope to earn is 0.82%. That’s well below the 5.5% rate of inflation in the UK.
Inflation’s relationship with stocks and bonds is a tad more complex, though both of these asset classes traditionally struggle amid rising prices. Put simply, any interest rate rises that take place to curb inflation can have a knock-on effect on the ability of businesses to borrow. This can stifle growth and harm share prices.
For bonds, during high inflationary periods, yields typically rise in order to attract new investors. This can harm bond prices, due to the close relationship between bond prices and yields.
How can you invest in gold?
If you want to put your faith in gold, then you essentially have two options:
- Buy physical gold
- Buy a gold exchange-traded commodity (ETC)
If you choose to buy physical gold, then you can do so through a gold bullion company. You may have to pay storage and insurance costs if you go down this route.
Alternatively, buying gold through a gold-backed ETC means you won’t actually own any physical gold. Despite this, the ETC will track the gold price, so if it rises, you’ll benefit. Of course, if it drops, you’ll lose out.
You can invest in a gold ETC through a normal share dealing account. Gold ETCs can also be held in a stocks and shares ISA. GPF Metals plc GPF Physical Gold is an example of a gold ETC that can be bought through Hargreaves Lansdown.
Is it a good idea to invest in gold?
Whether or not you should invest in gold will ultimately depend on your attitude to risk.
For example, if you’re keen to see your wealth grow over a long period and you’re willing to stomach short-term volatility in the market, then investing in stocks and shares may be the best option for you. That’s because stocks and shares traditionally outperform hard assets like gold over the long term.
However, if you’re risk-averse or nearing retirement, for example, you may hope to access your wealth in near future. As a result, protecting your wealth may be a better strategy for you.
We know that gold is often seen by investors as a decent way of protecting wealth, even if long-term returns may be sluggish. However, keep in mind there are no guarantees this will always be the case.
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About the author
Karl is a writer specialising in investing and personal finance content. He regularly contributes articles on savings, bank accounts, mortgages, and loans. He was previously a Personal Finance Writer for MoneySavingExpert.
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