Investing your hard-earned money requires careful consideration. Gold is one of the most popular assets – but is it a smart choice for your portfolio?
In this guide, we explore the key advantages and disadvantages of investing in gold, from inflation hedging to price volatility and storage costs.
Overview:
- Gold is often seen as a comfortable choice during economic uncertainty
- It can act as a hedge against inflation and can diversify your investment portfolio
- Disadvantages of investing in gold include price volatility, lack of income generation, and storage or insurance costs
- Different gold investments include physical gold, gold stocks, ETFs, and futures
- Gold investments could be subject to Capital Gains Tax
What is Gold Investment?
Gold investment involves allocating a portion of your financial portfolio to gold-based assets. These can include: Physical gold (coins, bars, jewellery) Gold mining stocks Gold ETFs or mutual funds Gold futures contracts
Each method comes with its own level of risk, cost, and return potential.
Gold Futures vs Gold Bullion
| Aspect | Gold Bullion | Gold Futures |
|---|---|---|
| Definition | Physical gold such as coins, bars, or jewellery that investors own and store | Contracts to buy or sell gold at a future date for a predetermined price - traded on exchanges |
| Ownership | Direct ownership of physical gold | No ownership of actual gold, only a contract |
| Storage | Requires secure storage, either personally or in vaults | No physical storage needed |
| Complexity | Simple to understand | Complex – requires knowledge of futures trading |
| Profit Potential | Generally long-term value retention | High potential for short-term profits due to market fluctuations |
| Risk | Lower risk – tied to physical asset value | High risk – price volatility and margin calls can amplify losses |
| Suitability | Suitable for conservative, long-term investors | Better suited for experienced or speculative traders |
The Pros of Gold Investment
Many people invest in gold due to its historical significance, stability, and ability to act as a hedge against inflation or economic uncertainty.
It can be a great choice if you’re looking for extra income, if you’re planning for retirement, or if you’re looking to add to your pension funds. Here are the benefits of investing in gold:
- Gold Has Historical Stability
- Gold Can Hedge Against Inflation
- Gold Diversifies Your Portfolio
- Gold is a Tangible Asset
- Gold Has High Liquidity
The Gold Market Has Historical Stability
One of the most attractive aspects of gold investment is its historical stability. Gold has been used as a store of value for centuries - with the first gold coins being used in around 500 BC.
Since the use of gold for currency, gold has endured economic downturns, wars, and fluctuations in currency values. This long-standing stability makes gold a reliable asset if you’re looking to protect your investments.
Gold Investment Can Be a Hedge Against Inflation
Gold has often been viewed as a hedge against inflation. When inflation impacts the value of currency, gold typically retains its value. This is why investors often turn to gold during times of rising prices - to preserve their purchasing power.
Gold Investment Can Diversify Your Portfolio
Another benefit of gold investment is that it is considered an alternative investment - making it a great way to diversify your investment portfolio.
Unlike traditional assets like stocks and bonds, gold often moves independently of other financial markets. This can help lower the degree of risk and improve the overall stability of your portfolio.
Gold is a Tangible Asset
Physical gold (for example, gold coins, gold bars and gold jewellery), is a tangible asset. It is something you can physically own, unlike other types of investments such as stocks and bonds.
Investing in gold coins and bars is appealing if you prefer to have direct control over your investments. Some people also invest in gold jewellery because it is not only a good investment, but it’s something you can enjoy aesthetically.
Gold Has High Liquidity
Finally, gold is considered a liquid asset. This means that it can be easily bought or sold in various markets around the world. This level of liquidity ensures that you can convert your gold holdings into cash relatively quickly when you need to.
The Disadvantages of Investing in Gold (What to Watch Out For)
Although there are many benefits to investing in gold, there are some potential drawbacks to consider before you invest your funds into gold.
Gold Does Not Generate Regular Income
Unlike stocks or bonds, gold does not generate regular income. Gold investments (especially physical gold) do not accrue interest or dividends over time. If you’re looking for a steady stream of income, gold investment may not be the right choice for you.
Gold Is Not Immune to Volatility
Although gold is typically considered a stable investment, it can still be subject to volatility. Gold prices can be influenced by:
- Economic uncertainty
- Political tensions
- Central bank policies
- Market sentiment
If you’re considering investing in gold, be sure to prepare for periods of gold price volatility to mitigate risk.
Gold Investment Has Added Costs
There are also added costs to consider when investing in gold. If you’re considering investing in physical gold, you’ll need to consider storage costs and security.
You may need to pay extra for secure storage facilities or insurance if you buy gold bars or gold coins, which will add to the overall cost.
How to Invest in Gold
Now we’ve explained the pros and cons of gold investment, let’s explore how you can begin investing in gold. There are several ways you can invest in gold, from buying physical gold to investing in gold stocks:
Physical Gold
Buy from reputable sources like the Royal Mint – some popular choices include Sovereigns and gold bullion bars.
Purchasing gold coins allows you to own a piece of history while participating in the precious metals market. If you’re considering investing in collectables, gold can be a great choice.
Gold Stocks
Another way you can invest in gold is by buying and selling gold stocks. Gold stocks represent shares in companies such as gold mining companies or gold production companies.
When you buy and sell gold stocks, you gain exposure to the gold industry and the stock market without needing to own physical gold.
If you’re considering investing in gold stocks, be sure to take time to research reliable stocks. It can help to speak with an expert such as a financial advisor to maximise your investment and determine your investment strategy.
Gold Mutual Funds and ETFs
If you’re looking for an easier, more diversified option, you could consider gold mutual funds and gold ETFs.
These financial instruments pool money from multiple investors to invest in a diversified portfolio of gold-related assets, offering a convenient way to gain exposure to the gold market.
Gold ISAs
In the UK, a Gold ISA (Individual Savings Account) provides a tax-efficient way to invest in gold. This allows investors to hold gold within their ISA, shielding potential gains from Capital Gains Tax.
Gold Investment and Capital Gains Tax (CGT)
In the UK, you may need to pay Capital Gains Tax (CGT) when you sell gold for a profit. Whether or not you're liable depends on the form of gold you invest in and how you hold it.
- Tax-Free Options – UK legal tender gold coins such as the Britannia and Sovereign are exempt from CGT
- Taxable Investments – Gold ETFs, mutual funds, and non-UK coins or bars may be subject to CGT on any realised gains
- ISA Wrappers – Holding gold within a Stocks and Shares ISA can protect you from CGT
Other Alternative Investments to Consider
While gold is a classic store of value, many investors are also exploring high-potential alternative investments, such as:
- Real estate – Income from rental yields or long-term growth
- Cryptocurrency – High risk but potentially high reward
- Art – Tangible assets with cultural value and investment potential
Whether you choose gold or alternative assets like art, the key is diversification. At Grove Gallery, we help art investors access high-potential, tangible assets. We have pieces of art to invest in from top names such as Banksy and Andy Warhol.
Explore our art for sale today, or call us on 020 8103 4905.
