Is gold a worthwhile investment? This question often arises when the gold price reaches new highs. The answer depends who you ask – some investors love it and others hate it. What is not in doubt is that throughout history gold has been humanity’s primary store of wealth.
For most of the past century, with some interruptions, the international monetary system was based on the gold standard. This meant nations’ currencies were valued relative to a standard value for gold.
The gold standard was eventually abandoned in the 1970s and since then the gold price has been variable and dependent on the markets. Governments nonetheless continue to regard gold as a fundamental store of value, with many holding significant reserves.
Gold’s daily price in US dollars per troy ounce, known as its spot price, is determined by two key trading markets: the global over-the-counter bullion market and the gold futures market, where derivatives, based on an estimated future price of gold, are traded.
The price is influenced by multiple factors including supply and demand, the dollar exchange rate against other currencies, inflation, interest rates, the equities and bond markets, and geopolitical issues.
Whether or not you should invest in gold depends on the term of your investment, your reasons for investing, and whether other asset classes may be more suitable for your purposes.
Gold is widely regarded as a “safe-haven” asset. Investors turn to it to protect their wealth when political tensions between nations rise, inflation rears its head, economies falter, currencies weaken or financial markets become too volatile.
Gold’s attraction is that, as a globally recognised store of value, it transcends the economies and affairs of individual countries. This means that if the country in which you own assets is showing signs of economic weakness or instability, gold offers a way to protect your wealth.
History clearly shows that when the going gets tough, nervous investors clamour for gold:
Even in less troublesome times, there is a case to be made for holding a small portion of gold in your portfolio for diversification purposes. Gold does not show any significant correlation with other asset classes, although the price of gold generally increases when inflation-adjusted bond yields decline.
A well-known manager of US hedge funds Ray Dalio recognises the diversification potential of gold over the shorter term. He argues that gold acts as a solid store of value, which is necessary in a world of high debt and high inflation.
The disadvantages of gold are embodied in the philosophy of US-based investment guru Warren Buffett, the CEO of Berkshire Hathaway. Buffet invests in well-managed companies that have good future prospects and whose shares are selling at a fair price, and then he holds those shares for long periods.
Buffett says he has no use for gold, first, because he is not interested in short-term movements in the markets, and second, because he regards it as a “non-productive asset”. Unlike commodities such as oil, copper or iron ore, which are valued because they are vital for industry, only a small fraction of gold mined is used for industrial purposes.
In other words, gold has little value apart from what people are prepared to pay to own it, and the only way you can benefit as an investor is if you sell it for more than what you paid for it. “Productive assets”, on the other hand, such as bonds, property or company shares, create value for society and generate income for investors through interest, rental or dividends.
Buffett says a productive asset will outperform a non-productive asset over time, and this is borne out by equities outperforming gold over the long term. Over 30 years to July 2024 the Dow Jones Industrial Average of top US stocks delivered 988% versus gold’s 538%.
A younger generation of investors and financial professionals are asking whether cryptocurrency, such as Bitcoin, is the “new gold” and whether it will replace gold as a 
safe-haven investment. They are similar in that they are both non-productive assets, worth only what investors are prepared to pay for them, and they transcend national affairs.
However, the prevailing view is that crypto assets such as Bitcoin are currently too volatile to offer a stable alternative to gold, whose age-old role as a store of wealth is unlikely to be challenged in the foreseeable future.
