Should You Invest in Gold? Navigating the Current Price Surge

What drives gold prices to record-breaking highs in today’s market? Why do financial experts remain cautious about gold as a long-term investment strategy? Should you invest in gold?

Gold has captured investors’ attention as prices soar past $2,600 per ounce, driven by global economic shifts, geopolitical tensions, and changing central bank strategies. Yet, despite its recent performance, gold has historically delivered lower returns than stocks and comes with unique investment challenges.

Keep reading to learn whether you should invest in this precious metal and how it might fit into your financial strategy.

Should You Invest in Gold?

Should you invest in gold? Gold prices have risen to unprecedented levels in the past year, driven by factors including monetary policy, geopolitical tensions, and shifting reserve strategies. Gold is seen as a safe haven during economic and political uncertainty, and analysts say current prices could continue to rise. However, it’s historically underperformed stocks in the long term.

We’ll examine experts’ views on whether you should invest in gold. 

Background

Gold’s value stems from its long history as a symbol of wealth and its practical uses. It’s prized in jewelry and technology, and it often holds its worth when economies struggle.

In recent years, gold has been on an upswing. The Covid-19 pandemic sparked increased demand for assets considered safe during economic uncertainty. This surge in interest drove gold to a then-record high of $2,070 per ounce in August 2020. 

This upward trend has continued into 2024, with prices soaring from $2,135 per ounce in December 2023 to an unprecedented $2,599.92 per ounce in September 2024, pushing the value of a standard 400-ounce gold bar over $1 million.

Price Increase Factors

Experts say several factors contributed to gold’s surge in 2024:

1. Monetary and Economic Influences:

• Monetary policy. The Federal Reserve’s 0.5 percentage point rate cut in September, with anticipated future cuts, makes gold more attractive than interest-bearing investments like savings accounts or bonds. 
• Currency shifts. Fiscal and trade deficits are weakening the US dollar, and some countries are reducing their use of the dollar in international trade. These trends make gold cheaper for investors using other currencies, increasing its appeal.
• Inflation. Despite current low inflation, investors are buying gold as a precaution against potential future price increases, given gold’s historical role as an inflation safeguard.

2. Global Trends:

• Geopolitical tensions. Ongoing international conflicts and uncertainties, particularly in the Middle East, are driving investors to buy gold, which is seen as a safe asset in turbulent times.
• Shifting reserve strategies. Central banks, especially in countries like Russia, China, India, and Turkey, are diversifying away from US dollar-denominated assets. 

3. Supply and Demand Dynamics:

• Limited availability. Gold’s finite supply, coupled with stable mining output, is putting upward pressure on prices as demand rises.
• Portfolio diversification. Investors are increasingly adding gold to their holdings to spread risk and safeguard their financial assets.
• Jewelry market dominance. Strong demand from the jewelry sector, which accounted for roughly 88% of gold consumption in the second quarter of 2024, is significantly driving overall gold demand.
• Tech industry growth. Emerging technologies in electronics and renewable energy are increasing industrial consumption of gold.  

4. Gold’s Unique Characteristics: 

• Universal appeal. Gold’s value isn’t tied to any specific nation’s economy, making it a globally recognized and traded asset.
• Inherent worth. Unlike stocks or bonds, whose value depends on the performance of companies or governments, gold possesses intrinsic value, making it attractive to investors wary of financial institutions or market instability.
• High liquidity. Gold is easy to purchase and sell compared to other assets. 

The Value of Gold

When it comes to the value of gold, many investors argue that gold was valuable historically because we used it as currency, not because it possesses intrinsic value. That being said, certain economists argue that there is no such thing as intrinsic value because goods are valuable only to the extent that consumers will pay for them.

The Essays of Warren Buffett indicate that it’s foolish to invest in gold because it’s a completely unproductive asset. Unlike a business, a gold investment creates nothing. Gold has any value at all only as long as people believe that it does. People who invest in unproductive assets hope that someone else will pay a higher price for them in the future—a hope that Buffet believes is based more in fantasy than fact.

Similarly, Scott Trench contends in his book Set for Life that buying gold isn’t a true investment because it doesn’t create real value or sustainable long-term wealth in the same way that investing in productive assets like businesses or real estate can. He explains that this sort of investment is speculation, which means buying assets solely in the hopes that their price will go up.

Risks and Downsides of Gold Investment

Despite gold’s recent strong performance, experts caution that investing in the precious metal comes with its own set of challenges and potential drawbacks:

• Underperformance in strong economies. Gold often loses value during periods of economic strength as investors shift to growth-oriented assets like stocks.
• Lower long-term returns. Gold has underperformed compared to stocks for more than a half-century: From 1971 to 2024, gold delivered an average annual return of 7.9%—significantly lower than the stock market’s 10.7%.
• Non-yielding asset. Unlike stocks or bonds, gold doesn’t generate regular income through dividends or interest, limiting potential returns to price appreciation alone.
• Tax implications. Physical gold investments face higher long-term capital gains tax rates compared to other financial assets, potentially diminishing after-tax profits.

Advice for Investing in Gold

While investing in gold has its risks, some contend that gold investment is a good way to diversify. In Money: Master the Game, Tony Robbins recommends using three “buckets” or overall divisions of your money. Decide how to divide your money in whole number percentages (for example, 30%, 60%, and 10%), based on your own risk tolerance and age.

• Bucket #1: Conservative investments—this bucket is for investments that will grow slowly but steadily, with relatively little risk. This involves cash (it’s important to hold some cash in case you need funds rapidly), government bonds, pensions, annuities, and life insurance policies. Be patient and hold onto these for the long term—in time, they’ll provide exponentially compounding interest.
• Bucket #2: Aggressive investments—this bucket is for investments that might yield massive gains but are also high-risk. These assets include corporate stocks—through mutual funds, index funds, and exchange-traded funds—as well as real estate, commodities (such as gold, oil, and wheat), and foreign currencies.
• Bucket #3: Enjoyable investments—unlike the previous two buckets, this one is for setting aside a small amount of money with which to enjoy your life now. As Robbins explains, there’s no point in getting wealthy if you aren’t living a good life along the way. Pick a small percentage and use that money to do things you love—such as taking a tropical vacation, going to the movies, or getting a new laptop. Investing in your happiness will help you enjoy life and stay moving toward your financial goals.

In A Random Walk Down Wall Street, Burton G. Malkiel provides similar counsel for diversifying your portfolio with gold. He advises that, unless you have ample resources in other instruments, assets such as gold should occupy only a modest part of your portfolio. He provides an example to illustrate his point. At the beginning of the 1980s, an ounce sold for over $800. By the early 2000s, it sold for $200. As of 2018, it sold for $1,200. Simply put, it’s too volatile to be a large part of your investments, but a modest position (say, 5% of your total portfolio) can be worthwhile in a well-diversified portfolio.

Looking Ahead

Analysts offer a range of projections for future gold prices. JPMorgan anticipates gold prices will average $2,500 per ounce by the end of 2024, while UBS forecasts prices could reach $2,700 per ounce by mid-2025. Some market watchers are even more optimistic, suggesting gold could hit $3,000 per ounce in the near future.

Several factors support these projections. Experts predict increased investor interest in gold-backed exchange-traded funds (ETFs), which enable the purchase of gold without having to own the physical metal, in the coming months.

The 2024 political landscape could also play a significant role in driving gold demand. With major elections scheduled in 64 countries, including the high-stakes US presidential race, the resulting political uncertainty may push more investors toward the perceived safety of gold.

Reflection & Discussion Questions

1. How might your personal financial goals and risk tolerance influence your decision about whether to include gold in your investment portfolio?
2. What role do emotions and psychology play in gold’s perceived value as a “safe haven” during uncertain times?
3. Given gold’s historical underperformance compared to stocks, what percentage of your portfolio (if any) would you consider allocating to gold, and why?
4. How do current global events and geopolitical tensions influence your perspective on gold as an investment option?
5. When comparing Tony Robbins’ three-bucket investment strategy with Burton Malkiel’s more conservative approach to gold investment, which perspective resonates more with your financial philosophy?
6. If gold has value only as long as people believe it does, as Warren Buffett suggests, what factors might cause its perceived value to significantly change in the future?

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