8 Pros and Cons of Investing in Gold

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.

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.

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 350

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%.

Security

Physical gold’s greatest strength is that it is a tangible asset that will always hold its value. Its appeal lies in the fact 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.

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.

Real Growth S&P500

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. 

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.

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.

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.

Portability 


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.

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.

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

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. 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.

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.

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.

No income stream

 

Physical gold pays no dividends, and thus, gold bullion does not give investors an income stream. This needs to be factored into your investment decisions because investing in gold stocks or other listed asset classes would give you a passive income stream, which contributes substantially to total performance over time.

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.

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.

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.

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.

Why PAR 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.

August 18th, 2023Investing

About the Author: Sharon Wood

Sharon Wood is an accomplished journalist and communications expert with a rich background in the financial services sector. With 15 years of experience leading communications for top South African asset managers, she founded Linktank Connect, a financial communications firm. Sharon has worked with renowned financial publications like Financial Mail, Finweek, and Business Maverick. She holds a BA in Journalism and Economics (Cum Laude) from Rhodes University, a postgraduate degree in Financial Planning from Free State University, and has completed various financial exams including JSE Financial Statements and Taxation, Investment Advice, and Stockbroking.