Is gold a good investment?

A recent report from the Perth Mint claims “many astute investors allocate 5–10% of a diversified portfolio to gold”. It goes on to say that gold has risen in value by 460% over the past 20 years, climbing from $A450 per ounce to more than $A2,450 between 2000 and 2020.

The Perth Mint claims this makes gold one of the best performing asset classes of that period. But there are downsides to investing in gold – even if it only represents a small part of your portfolio.

To begin with, the value of gold doesn’t follow a consistently upward path. It fell to $A2,200 per ounce in March 2021, down from a high of $A2,780 in August 2020. It’s currently trading at $A2,590 so gold hasn’t yet returned to its previous high.

This highlights the need to hold onto gold for the long term if you want to maximise the gains. However, the problem with a long term approach is that gold doesn’t generate ongoing returns.  So yes, you could earn a reasonable capital gain over, say, 10 years, but it comes at the cost of regular, ongoing returns that can be reinvested to benefit from compounding.

On a practical level, bars of gold bullion are hardly the sort of thing you want to leave around the house. That means paying storage fees. This can cost as much as 1% of the value of your gold annually. Other costs can apply too including transaction fees and buy/sell spreads when you go to sell up.

The upshot is that the ongoing costs combined with a lack of regular returns can take the lustre off gold as an investment. That said, there are options beyond directly owning the precious metal. This can include buying shares linked to gold, which typically means resource stocks such as Newcrest Mining, Northern Star Resources or Evolution Mining.

An alternative is exchange traded funds (ETFs) with a focus on gold. These offer the benefit of exposure to the global gold market without the costs of owning physical gold. Investors can pick from ETFs that invest in companies which mine and produce gold, or ETFs that track the price of gold. Expect to pay fees with ETFs, but at around 0.5% annually it can be a lot cheaper than directly holding bullion.

As I noted, gold tends to come into the spotlight during times of inflation or uncertainty. And right now, we’re seeing both. But it’s important to consider whether gold really has a role to play in your portfolio. Yes, it’s a very attractive metal. As an investment though, it can soon tarnish.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.

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