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Guide to gold: why do people invest in gold?
Curious as to why people still invest in gold? In this guide, find out why investors choose gold, how they access the precious metal, and some of the possible pros and cons of investing in gold.
Gold is one of the oldest stores of value in the world, with humans having traded it for millennia. Investors today continue to include gold in their portfolios.
Since the Egyptians smelted it more than 5,000 years ago, many cultures have revered gold as valuable. It's been a currency itself in the form of coins, and even to underpin the currencies we now use every day. The UK used the 'gold standard' to determine the value of the pound until 1931, while the US used it for dollars until 1971.
Nowadays, no modern currency is fully backed by gold. But many governments still hold gold reserves. It's also a popular choice with investors around the world. But why?
Why investors choose gold
These days, investors often favour investments such as stocks and shares, bonds, and funds. Yet, gold still plays a pivotal role in many people's portfolios. There are a few different reasons why.
Firstly, gold is scarce and there's a finite amount in the world. Mining gold and adding to this supply takes great time and expense.
As a result, gold is valuable thanks to supply and demand. And it retains that value because, unlike 'paper' money, you can't print more of it.
This can make it a useful hedge against inflation. As prices rise over time, the spending power of cash actually decreases in real terms. That's unless the growth on it (usually from savings interest) is at least as high as the rate of inflation.
By contrast, gold tends to hold its value over the long term. It has also historically grown in value, especially when inflation is high and interest rates are low. Of course, past performance doesn't necessarily indicate what will happen in future.
On similar lines, gold's value is distinct from companies and governments. A business could go bankrupt overnight and its shares become worthless. Likewise, a government could default on its debts.
But this isn't the case for gold. It doesn't depend on businesses or governments, and tends to be less affected by market dips or geopolitical events.
So, many investors use gold to diversify their portfolio as it's seen as a 'safe-haven' asset, particularly in times of market volatility.
Gold is also widely considered valuable, so it's bought and sold fairly easily. This makes it liquid, meaning you can access the value when you need to.
This offers gold investors an option to (relatively) quickly access the money tied up in their investment.
Gold isn't the only precious metal investors are interested in. Silver is also popular, as are the six platinum group metals, or 'PGMs':
- platinum;
- palladium;
- rhodium;
- ruthenium;
- iridium; and
- osmium.
These metals can have industrial uses, which is what defines their value. This differs to gold, and to some extent silver, which are usually bought and traded for their ability to hold value, rather than their practical use.
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Get startedHow investors access gold
You can invest in gold and other precious metals in different ways:
- Buying physical metal - you could buy individual gold coins or bars. Note that you'll usually need to pay for storage and insurance.
- Investing in exchange-traded commodities (ETCs) - in the UK, you can invest in ETCs, offered by companies that own physical gold. You can effectively buy a slice of that gold by buying shares in the ETC on the stock market.
- Mining stocks - rather than investing in gold itself, some investors buy stocks in gold miners. This offers exposure to gold and precious metals without directly investing in them.
- Digitally - there are now forms of digital-based gold, backed by physical metal.
Downsides to investing in gold
While gold could offer benefits in certain situations, it's still an investment. As a result, there are downsides to consider before you invest.
Firstly, physical gold is expensive to store and insure, especially if you pay a provider to do this. These costs could eat into any potential growth the gold generates.
Speaking of growth, while it has increased in value, gold can lag behind other investment classes. The table below shows gold's annualised returns compared with those of the S&P 500 (an index of the 500 largest companies in the US) from 2006-2026.
Gold's annualised returns of 8.2% are by no means unimpressive. But, this is lower than those generated by the S&P 500, which produced annualised returns of 10.1% (when dividends are reinvested). Past performance doesn't necessarily indicate future performance, but this is still an interesting point of comparison.
Perhaps surprisingly, it's also more volatile than these investments, meaning its value tends to swing up and down more. According to State Street, in the 30 years to 2019, gold had an annualised volatility rate of 15.44%. That compares to 14.32% for the S&P 500.
The difference is minimal in the long term. But it goes to show that gold may not always be the stable, safe-haven asset it's perceived as.
There's also a potential opportunity cost with gold. By holding cash, you'll usually receive interest. And with stocks and shares, you might receive dividends alongside any growth your investments generate.
But gold doesn't offer the opportunity of these regular returns. Instead, you'll need to rely on gold prices rising so you can then sell your holdings and access that value. That growth isn't guaranteed, either.
As a result, if interest rates are fairly high, you may get better real returns from holding cash.
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Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
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