8 Pros and Cons of Investing in Gold in 2024
It’s hard to resist the appeal of gold, which shines so bright and has been a symbol of such riches for individuals and countries since time immemorial. But does it deserve a place in your investment portfolio?
Before deciding whether and where to invest in gold, it’s crucial to understand what makes gold so valuable, what your options are if you do want to invest in the precious metal and what you can expect from your investment over time. Knowing the advantages and disadvantages of investing in gold can help you make a more informed decision.
what your options are if you do want to invest in the precious metal and what you can expect from your investment over time.
In this article, we set out to answer the question, “Is gold a good investment?”, by delving into the pros and cons of investing in gold and spelling out some of the lesser-known disadvantages of investing in gold even though it has always been seen as a failsafe way of getting rich quickly.
Why is Gold Valuable?
Gold is the only asset that has truly stood the test of time, benefiting from its scarcity, durability, and malleability to uphold its value since it was first discovered in Egypt almost 4 500 years ago. Its glittering allure and promise of riches have seen it become the cause of wars, trade blockades and cruel human betrayal.
Since then, it has developed an enduring reputation as the money of kings and the only object of great value you would have been left with in the event of a war or a financial market collapse. However, when considering the question, “Is buying gold a good investment?”, you first need to understand why gold is valuable, and this comes down to the three essential fundamental qualities that have defined the precious metal’s value since it was discovered. Additionally, evaluating the advantages and disadvantages of investing in gold is crucial for making an informed decision.
Scarcity
Gold has managed to rise to the top of the ranks as a metal because it is scarce enough but not so rare that it cannot be used as a unit of exchange at scale globally. Its fundamental value relies on the fact that there is a finite amount of metal in the world compared with other metals.
Durability
Most of the gold discovered by ancient civilizations still survives today. Classified as an inert metal, its durability is fundamental to its status as a store of value throughout time. Does gold depreciate? No, its ability to last stems from it being able to weather any natural event.
It also never loses its luster, like silver, because it is the only metal that doesn’t react to gas or liquids.
Malleability
Gold is the most malleable metal because of its atomic structure, which is layered, and there is no link between the layers so that they can slide over each other as pressure is applied. To give you an idea of just how malleable it is, one ounce of the metal can be beaten into a paper-thin sheet of more than 9 square meters or stretched into a wire more than 80km long.
Malleability contributes to gold’s value because it allows the metal to be turned into precious jewelry, gold coins or gold bars, allowing it to be stored, worn, or moved easily.
Given these traits, the precious metal has been an everlasting store of value, residing either in private hands or as a government-backed means of exchange. For most of its history, it has been a currency, first turned into gold coins in 700 BC and then determining the value of the dollar during the Gold Standard between 1873 and 1971.
Since then, it has developed an enduring reputation as the money of kings and the only object of great value you would have been left with in the event of a war or a financial market collapse. However, when considering the question,
“Is buying gold a good investment?”, you first need to understand why gold is valuable, and this comes down to the three essential fundamental qualities that have defined the precious metal’s value since it was discovered.
Different Types of Gold Investment
Gold bars
Gold bullions are the gold bars that are icons of the precious metal and immediately come to mind when you think of buying gold as an investment. They come in various sizes, as small as one gramme and as large as 20 grammes and are composed of at least 99.5% pure gold. You can buy gold bullion from an online dealer, a collector, or a local dealer. They will charge a premium for their services, which ranges from 2% to 20% above gold’s spot price. It is crucial to buy from a reputable dealer who will guarantee the quality of the gold in the bar.
Gold coins
Gold coins are also considered to be gold bullion and have been around for centuries. You have a choice of a range of different coins, minted by different central banks. The most well-known coins include the American Gold Eagle, Canadian Gold Maple Leaf, or South African Krugerrand. Investing in gold coins’ pros and cons are that they are more portable than bullion, but it’s also costly to hold them. To invest in gold coins, you should buy them from a reputable dealer to assure you of their quality, and you will pay the dealer a premium for guaranteeing their authenticity.
Gold jewellery
Gold jewellery is less of a financial investment and more of a statement of wealth and aesthetic taste. The link between the value of the gold and the ultimate product is more tenuous than other forms of physical gold. However, a collection of gold jewellery can be of great value as an emergency stash that can be realised when most needed. Again, you need to buy pieces from trusted jewellers if you want to be sure of the quality of the gold.
Gold mining stocks
Gold mining stocks have important investment attributes that physical gold doesn’t have, but choosing which stocks to invest in requires deep fundamental research. Gold mining stocks offer the potential for potentially substantial capital appreciation and income stream. You would buy gold stocks from a stockbroker after setting up a broking account.
Gold ETFs and Gold Mutual Funds
You can have indirect and more diversified exposure to gold by investing in listed Gold Exchange Traded Funds (ETFs) or gold mutual funds, which provide you with exposure to a portfolio of listed gold companies. Gold ETFs can either give you exposure to physical gold or a group of gold companies. You would first need to identify the ETF or mutual fund that is most likely to meet your investment objectives and then buy them from a stockbroker or an investment management company.
8 Pros of Investing in Gold
Gold has been a more stable investment than other asset classes during times of economic and geopolitical crisis. It’s regarded as one of the world’s investment safe havens because when financial markets are under pressure, such as now, investors often flee to the safety of gold. According to data from GoldSilver, gold prices went up in six of the last eight biggest stock market crashes over the past four decades. During the Global Financial Crisis, the gold price increased by more than 25%, whereas the S&P 500 Index fell by more than 50%.
Pro: Security
Physical gold’s greatest strength is that it is a tangible asset that will always hold its value. One of the other reasons to invest in gold is that owners and investors can hold it in their hands, appreciate its value, and gain a sense of security that it will always be there. The precious metal’s value also rests on its rarity and the fact that politicians or policymakers cannot issue more or less of it as they can with, say, the dollar.
Pro: An inflation hedge
Gold prices have outpaced inflation in the long term, preserving wealth and protecting investors, particularly in times when interest rates are rising, such as now. The precious metal maintains its purchasing power like few other assets. Based on analysis by personal finance and investment expert Steven Keys, gold has delivered an annual after-inflation return of 1.2% annually since 1974.
Pro: Diversification
Gold is typically uncorrelated with other asset classes, rising when they are falling and falling when they are rising. Adding it to an investment portfolio reduces the overall risk profile of a portfolio and smooths out its return profile. Since 1884, the negative equity-gold correlation has exceeded -50% in 1987, 1990, 1993, 2001, 2002, 2003, and 2008. In 2021, the 65-day correlation was -58% – its most negative correlation since 2003.
Pro: Gold shares pay dividends
Unlike other asset classes, physical gold has the disadvantage of not offering an income stream. However, gold stocks, when carefully chosen, do distribute the dividends investors don’t receive from bullion while still giving investors exposure to the other benefits of investing in gold.
Pro: Capital growth upside
Gold shares offer far more capital growth potential than physical gold because the share prices of well-managed gold companies can offer leveraged exposure to the underlying gold price. So, a relatively small increase in the gold price can result in greater increases in the company’s stock price.
Pro: Direct and indirect gold exposure
There are many ways of getting exposure to gold, each with different pros and cons. You can get physical exposure through bullion, coins and jewellery and indirect, paper-based exposure to gold via gold stocks, ETFs, and mutual finds. As with all investments, the decision of where to invest should be made based on the investor’s risk profile and financial goals.
Arguably the most enduring characteristic, and the one that has been most appealing to holders of physical gold throughout history, is the fact that it is portable and can be moved anywhere. Gold comes in different sizes and forms, from jewellery, and coins of different sizes to bullion bars, which means you can move either your entire investment or part of it in times of need.
Pro: Paper-based gold investments
Investors who buy gold shares, ETFs and mutual funds don’t get the same full benefits of buying the physical metal because the relationship between investing in paper versus physical gold is not perfectly correlated. There may be times when the gold price will increase, but the value of a listed gold portfolio may decline. This is one of the significant disadvantages of investing in gold through these means.
Pro: Jewellery’s investment complexity
Investors who buy and sell jewellery can make money, but there’s a lot more at play when determining the value of gold jewellery that cannot be rationally quantified. Also, the costs of making jewellery are higher than the premium investors would pay for other forms of physical gold and varies between 6% and 14% of the price of gold.
8 Cons of Investing in Gold
Con: Costs of securing gold
Gold investors need to secure their investment and thus incur ongoing storage and insurance costs that eat into the potential profits offered by an investment in the precious metal. This highlights one of the significant risks of investing in gold. You can store the gold yourself, but you need a safe that’s big enough, and you run a greater risk of theft than securing them with a professional storage company.
Con: Investment costs
Investors in gold bars and coins must pay a premium for the dealer’s services, while investors in gold ETFs and shares pay brokerage fees. These costs need to be factored in an investor’s cost-benefit analysis before including gold in a portfolio.
Con: Underestimated volatility
Though gold offers investors a steadier ride over time, it can be more volatile than envisaged at times, with swings of between -50% to 100% in periods as short as two years. So don’t be surprised if you experience prolonged periods of negative returns.
Con: Lack of Passive Income and Consistent Returns
Physical gold pays no dividends, meaning investors do not receive a passive income stream from gold bullion. Unlike rental properties or dividend-paying stocks and bonds, physical gold does not generate regular returns. Investors must rely solely on price appreciation for gains, which can be unpredictable and volatile. While gold offers security and a hedge against inflation, it does not provide the steady cash flow that other investments might offer, making it less appealing for those seeking ongoing income. This factor should be considered in your investment decisions, as investing in gold stocks or other listed asset classes can provide passive income, contributing substantially to total performance over time.
Con: Purity considerations
It’s not easy to determine the purity of physical gold at face value, which is why it’s so crucial to buy gold bars, coins, or jewellery from reputable sellers.
Con: Opportunity costs
Gold does underperform for significant periods of time, and historical performance shows that equities have outperformed gold by 16 times since 1974. Thus, when you invest in gold, you risk losing out on significant outperformance of other asset classes.
Con: Paper-based gold investments
Investors who buy gold shares, ETFs and mutual funds don’t get the same full benefits of buying the physical metal because the relationship between investing in paper versus physical gold is not perfectly correlated. There may be times when the gold price will increase, but the value of a listed gold portfolio may decline.
Con: Jewellery’s investment complexity
Investors who buy and sell jewellery can make money, but there’s a lot more at play when determining the value of gold jewellery that cannot be rationally quantified. Also, the costs of making jewellery are higher than the premium investors would pay for other forms of physical gold and varies between 6% and 14% of the price of gold.
Tips for Optimal Gold Investment
Investing in gold requires careful consideration and strategic planning. Here are some ways to help you make the most out of your gold investment:
- Diversify Your Portfolio: Don’t put all your money into gold and balance your investment by possessing a combination of stocks, bonds, and other assets to reduce the risk of relying solely on one.
- Understand the Market: Stay informed about the factors affecting gold prices, such as geopolitical events, economic data, and central bank policies.
- Choose the Right Type of Gold Investment: Decide whether to invest in physical gold (like bars and coins), gold ETFs, gold mining stocks, or gold mutual funds, based on your risk tolerance and investment goals.
- Consider Costs and Storage: Be aware of the costs associated with purchasing, storing, and insuring physical gold. Evaluate if these costs outweigh the benefits of your investment strategy.
- Long-Term Perspective: Gold is typically a long-term investment, so be prepared to hold onto your investment through any market fluctuations that might occur.
- Monitor Economic Indicators: Keep an eye on interest rates, inflation, and currency strength, as these can significantly influence gold prices.
- Invest in Reputable Dealers: Ensure you buy gold from trusted and reputable dealers to avoid counterfeit products and secure fair pricing.
- Stay Patient: Gold prices can be volatile in the short term but tend to hold value over the long term. Avoid making impulsive decisions based on short-term market movements.
By following these tips, you can optimize your gold investment strategy and potentially enhance your returns.
Why Pan African Resources is a Good Investment
Pan African Resources (PAR) offers many features that make it a promising investment and a good way to get exposure to the gold mining industry at a time when the gold price is benefiting from the prevailing geopolitical ructions.
These are its resilience in the face of electricity load shedding in South Africa, its investment in renewable energy plants, which will substantially reduce its dependence on state-owned electricity, and the potential offered by its upcoming Mintails project.
Loadshedding has been a major headwind for most companies this year. Gold mining companies, in particular, rely heavily on electricity. So, it’s no surprise that PAR recently issued new production guidance that is lower than previously expected. The mid-sized company, which engages in gold mining in South Africa, now expects production of 175 000 ounces – 15% lower than its 205 000-ounce record high in 2022.
However, it’s promising that production at PAR’s tailings operations, which contributes about 40% to overall production, increased in the first half of this year compared to the previous year. The tailings operations are less electricity intensive than the underground operations and don’t have to stop production during load shedding as often as the underground mining operations.
PAR is also investing heavily in renewable energy sources to alleviate the strain of load shedding on its operations. It is the first mining group to bring a solar plant online. The 9.9MW unit at Evander came into operation in May 2022 and is the first of four planned plants, raising the mining group’s future electricity-generating capacity to 40 MW and meeting 15% of its own energy needs by 2027.
At the end of March this year, PAR finalised the funding for its Mintails project, which is scheduled to come on stream at the end of 2024, adding 25% of cheap and safe ounces to its annual production capacity. Shareholder Charl Botha describes the projected economics of Mintails in Biznews as “sweet” and that he “couldn’t be happier with the results.”
When Mintails is up and running towards the end of 2024, it will not only increase PARs annual production by about 25%, but the ounces it is likely to add will be both “cheap” and “safe”.
PAR takes Environmental, Social and Governance (ESG) factors seriously and is wholeheartedly committed to reducing its environmental footprint. It has rehabilitated 22.3 hectares of the land it operates on to date. At its Evander Mine, the group has been reprocessing historic gold tailings to allow rehabilitation of the dump footprints, allowing for alternate and more productive use of the land.
Conclusion
Considering all the factors that determine gold’s value and investing in precious metals’ pros and cons, there’s no doubt that gold deserves a place in any investment portfolio. But given there are various ways to invest in gold, you need to do your homework and determine which avenue for investing best suits your financial needs and goals.
FAQs
What are the disadvantages of investing in gold?
Investing in gold comes with several disadvantages. Physical gold does not generate passive income or dividends, leading investors to rely solely on price appreciation. Additionally, owning gold incurs storage and insurance costs. The metal’s value can be volatile, and there are opportunity costs involved as gold may underperform compared to other investments over time.
Why is gold considered a risky investment?
Gold is considered risky due to its price volatility and lack of passive income. Market fluctuations can also lead to unpredictable returns with examples being geopolitical events like war, economic data, and central bank policies. Unlike other investments that offer dividends or rental income, gold’s value appreciation is the sole source of profit, making it less appealing for those seeking a more steady income.
Is it still a good idea to invest in gold?
Yes. Investing in gold can be a good idea, especially if you are looking for diversification in your portfolio and if the gold you invest in is used as a hedge against inflation. Gold’s enduring value and historical performance during economic downturns, unlike other investments, also make it a reliable store of wealth. However, you should always balance any gold investments you make with other assets in your portfolio and always stay informed about fluctuating market conditions and economic factors.