Gold Investment FAQ’s

Like all commodities, gold’s value fluctuates both up and down in response to market conditions, which affect demand for and supply of the precious metal. Demand for gold comes from four key sectors – jewellery, private investment, central bank reserves, and industry. Each sector is affected differently by changes in market conditions.

Rises in the price of gold occur when demand outstrips supply. Consumer and industrial demand and market instability are the primary motives for increased demand for gold. Jewellery makes up about half of the world’s mined gold. 

Rapid population growth in the two largest markets for gold – India and China – has fuelled increasing demand. Industry requires less gold by tonnage, but the exponential growth of hi-tech electronics places growing demand on supplies.
Market instability drives purchases by private investors and, most importantly, massive purchases by central banks. Gold is a traditional safe-haven investment when markets are uncertain or falling, attracting heavy investment from financial institutions and individuals alike. 

It was chiefly central bank demand during the 2008 global financial crisis and ensuing great recession that drove gold to an inflation-adjusted peak of 385% above the 2005 price. Investor demand during the upheaval of the coronavirus outbreak pushed the price of gold to an all-time high in August 2020 at a time when the stock market was down over 20% on the year. 

Falls in the price of gold occur when supply outstrips demand. Increased investor and central bank confidence in market stability is the chief motivator for divesting gold. When investors are confident that global markets will continue to rise, they accept greater exposure to riskier investments that may appreciate more rapidly and potentially pay out dividends. If the price of gold drops below the level at which it is economical to extract it, mines may close (restricting supply) until the price returns.

he final factor that affects the price of gold is the value of the currency you use to buy it. Like all currencies, over time the value of the British pound sterling is eroded by inflation. Over the last two decades as goods have become more expensive incrementally year on year, £10,000 of goods in 2000 would cost over £17,700 today. 

 
The relative value of the currency against the US dollar, the de facto global reference and reserve currency, also affects the price of gold in that currency. Over the same twenty-year period, the purchasing power of the pound has fallen over 20% against foreign currencies. Both have effectively increased the price of gold in pounds sterling. 

Like all commodities, gold’s value fluctuates up and down in response to market conditions. The ideal time to buy would be when prices are low, then sell when they are high, but it is very difficult to predict all market moves.

Investors tend to seek a safe-haven to ride out global financial and political instability, and this has impelled the price of gold up significantly since the turn of the millennium.

However, new investors should remember that current prices are relative to the recent past and future, not the distant past. Delaying or forgoing investment when prices are rising (or seem high in comparison to decades-old figures), in the hope that they will fall, leaves investors exposed to the market conditions that are driving the price higher.

The price of gold changes every few seconds during market trading hours. This live price is known as the ‘spot’ price, and it represents the price of gold at the exact moment. The spot is mostly of interest to margin traders trying to exploit small differences between prices.

More useful for investors, especially those looking to compare gold prices over time, are the prices declared at the middle and end of the trading day. The London Bullion Market Association’s ‘fixes’ are internationally recognised as the definitive price of gold.

There are a number of online resources for viewing the spot and historic fix prices of gold. The LBMA’s website is an excellent resource. It’s easy to use, and packed with useful data. Most importantly this data is reliable and trustworthy.

Like all commodities, gold’s value fluctuates both up and down in response to market conditions. However, the overall trend is obvious: the price of gold has risen for more than fifty years. 

This rate of growth has only accelerated in recent years. In 2000 a troy ounce of gold cost £184. That price rose to £1,382 by the end of 2020. Even adjusted for inflation, that’s a rise of more than 345%.

The world’s rapidly growing population continues to spur demand for gold jewellery, investments, central bank reserves and industrial gold. At the same time gold yet to be mined is being depleted – it’s estimated that less than 25% of global recoverable reserves remain unexploited. 

While current demand is being satisfied by mining gold reserves, this supply is not limitless. Long-term, as supply is unable to keep up with demand, the gold price will reflect this imbalance through growth.

We all know it’s not wise to keep all your eggs in one basket. Most financial advisors suggest investors keep a diversified investment portfolio. This spreads both risk and benefit, reducing investors’ exposure to falls in any one sector and allowing them to keep a mix of high, medium and low-risk investments.

Financial advice is tailored to the individual investor’s aims and appetite for risk. It is quite common for investors to hold a portion of their low-risk investments in gold as a hedge against other investments. While gold does not pay dividends or guaranteed returns, it usually performs inversely to equities, which means that it will often rise when the market falls. This insulates investors from their exposure to equity risks. The volatility of equity markets over the last twenty years has meant gold has massively outperformed stocks.

There are two fundamental ways to hold gold as part of an investment portfolio. Shares of gold funds, or ‘electronic’ gold, are easily bought and sold, but like most investments engender tax liability and potential counterparty risk. Physical gold is a tangible asset, which allows some companies to offer segregated storage for maximum security, while some types of physical gold don’t attract tax liabilities. However, physical gold does accrue ongoing costs of storage and security and is less liquid than ‘electronic’ gold.

The so-called ‘bid/offer spread’ is the difference between the price you can buy gold and the price you can sell it at. This spread exists in all tradable assets, and accounts for the difference in say the currency you can buy at the post office on your way to your holiday and the (lower) price for that currency when you convert it back into pounds.  

The gold spread means if you buy gold today at a particular price and choose to sell tomorrow, unless the gold price has risen by a greater amount than the bid-offer spread, you will not recoup the same or more than your initial investment.  

To prevent repeated exposure to the bid/offer spread, investment in physical gold is generally recommended for long-term investors. Allowing the price of gold to rise over time and then selling your investment will effectively allow an investor to still generate a profit.   

Some providers do offer access to rapid liquidity for investors who may need to access it in emergencies or wish to respond to rapidly changing market conditions. At the Pietra Sussan Company, we offer all our investors a Buy Back Guarantee on all gold purchased through us. 

Recessions that depress the stock market tend to see a rise in gold prices. The bursting of the Dotcom bubble sent the markets on a long downward spiral, falling almost 50% in the months between early 2000 and late 2002. But during that time gold held its own, staving off the slump that besieged overvalued stocks and rising more than 10% in the period.

The most recent financial crisis, which started with a bear market in 2007 and continued for two years, knocked 56% off the S&P 500 index, while the housing market also crashed on both sides of the Atlantic. But the gold price rose by a quarter in that time. It continued to rise for three more years as recession uncertainty and the fallout of the global financial crisis sent many investors looking for the safe-haven asset.

The price of gold is only one half of the equation to consider: the other is the safety of alternative investments. The last recession was the deepest since the Great Depression. During this, Britain witnessed its first run on a bank in more than a century, and the Government was forced to intervene to prevent the collapse of five British lenders. The FTSE 100 fell 5.3% in a single day, and an average of 22% over two years. It is far from clear whether investors’ money will be any safer in equities in the next recession than it was in the last.

Long-term financial forecasting – including predicting recessions – is not an exact science, and as with any investment, past performance is not a sure indicator of future results. It is for investors to judge whether the factors that raise the price of gold – political and financial instability, global upheaval, private and industrial demand – are likely to recur in the near future, recession or not.

Gold has been a safe-haven asset for centuries, and this trait is a good indicator of its resilience in a recession. When other assets that are tied to the health of the economy come under pressure during the lean years, the immutability and innate value of gold comes into its own.

That doesn’t mean gold only ever goes up during a recession. Depending on the length of the recession and the factors affecting the gold price, including inflation, currency value, demand and supply, there can be some fluctuations within the recessionary period. But in general, in recent history, the price of gold has maintained its value or outperformed other asset classes during times of economic instability.

The great recession of 2008 had very severe and long-lasting repercussions. Stock markets plunged at the height of the financial crisis while gold began to rise as the severity of the situation became evident and continued an ardent run, rising almost 200% in four years. The recession in the early 1980s prompted a spike in the gold price early on, and the Dotcom bubble burst of 2000 also saw gold on the rise as markets fell.

The economic devastation of the coronavirus outbreak, and the ensuing fall in GDP as well as the gloomy forecasts for recovery, proved a fillip to the gold price, which rose 16% in 2020.

As with any investment, past performance is not a definitive indicator of future results. It is for investors to judge whether the fundamental forces that drove the price of gold up during past recessions will continue to do so in the next.