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In a world where financial markets often resemble roller coasters and economic stability can seem elusive, there’s one asset that has stood the test of time: gold. For centuries, gold has been revered not only for its intrinsic beauty but also for its role as a store of value and a hedge against economic uncertainty. In New Zealand, as in many parts of the world, gold continues to attract investors seeking stability and diversification in their portfolios.
However, like any investment, gold comes with its own set of advantages and disadvantages that investors must carefully consider before allocating their funds. Some advantages to investing in gold are:
Hedge against economic uncertainty
Gold has historically served as a hedge against economic instability and market volatility. During times of economic downturns or geopolitical tensions, gold often retains its value or even appreciates, providing investors with a reliable store of wealth when other assets falter.
Portfolio diversification
Gold’s low correlation with traditional assets like shares and bonds makes it an effective diversification tool. By adding gold to a portfolio, investors can reduce overall risk and improve risk-adjusted returns, particularly during periods of market turbulence.
Inflation hedge
Gold has intrinsic value and, as a result, serves as an effective hedge against inflation, preserving purchasing power over the long term. When inflation rises, the value of gold typically follows suit, helping investors maintain the real value of their wealth.
Tangible asset
Unlike shares or bonds, which represent ownership or debt obligations, gold is a tangible asset with inherent value. Its physical presence provides a sense of security and permanence, making it a popular choice for investors seeking to diversify their portfolios with assets they can see and touch.
Global acceptance
Gold is universally recognised and accepted as a form of currency and store of value. Its liquidity makes it easy to buy, sell and trade in markets around the world, offering investors flexibility and accessibility when managing their investment holdings.
Long-term wealth preservation
For investors with a focus on wealth preservation, gold offers a compelling opportunity to safeguard assets for future generations. Whether held as a long-term investment or passed down as a family heirloom, gold has a timeless quality that transcends generational boundaries. Its enduring value provides a sense of financial security and peace of mind that few other assets can match.
However, like all investments, there are some disadvantages to investing in gold:
No income generation
Unlike many shares, bonds, term deposits or property, gold does not generate income for investors. It produces no dividends, interest, or cash flow, which means investors rely solely on price appreciation to generate returns. As a result, gold may not be suitable for investors seeking regular income from their investments.
Volatility
While gold is often viewed as a safe haven asset, it is not immune to volatility. As with any commodity, its price can fluctuate significantly in response to changes in supply and demand, geopolitical events and economic factors. Investors should be prepared for periods of price volatility when investing in gold.
Storage and security costs
Investing in physical gold requires proper storage and security measures to protect against theft, loss or damage. Storage costs can add up over time, particularly for large holdings, and may erode investment returns. Additionally, insurance premiums may be necessary to safeguard against unforeseen risks.
Limited utility
Unlike other commodities such as oil or agricultural products, gold has limited industrial utility. This means its primary value lies in its role as a store of wealth and a medium of exchange, rather than its practical applications. As a result, the demand for gold is driven primarily by investment and jewellery demand, which can be subject to fluctuations over time.
Opportunity cost
Investing in gold ties up capital that could otherwise be deployed in other investment opportunities. While gold may provide diversification benefits and hedge against certain risks, it may not always deliver the highest returns compared with other asset classes over the long term. Investors should weigh the opportunity cost of holding gold against potential returns from alternative investments.
There are gold investments that you can buy into so that you don’t need to buy physical gold, and there are also indirect ways you can invest in gold, such as gold-mining companies. As with any investment, it’s essential for investors to carefully consider the pros and cons of investing in gold and evaluate how it fits within their overall investment objectives, risk tolerance, and financial goals. By understanding the potential benefits and drawbacks, investors can make informed decisions that align with their long-term wealth-accumulation strategies.
Lisa Dudson is an investor, entrepreneur and author of eight bestselling personal finance and property investment books. She has been a media commentator on financial issues for more than 20 years and is known for pragmatic, meaningful and easy-to-understand financial advice. She is a director and shareholder of Saturn Advice and National Capital and provides financial and property advice through her consulting business www.acumen.co.nz Lisa’s advice is of a general nature, and she is not responsible for any loss that readers may suffer from following it. She cannot correspond directly with readers or give financial advice.
