Gold and precious metals
Gold pays no interest, no rent and no dividend. You only earn if the price rises. Over very long periods gold has preserved purchasing power, but there have also been decades in which it brought nothing in real terms.
Learning objective: After this lesson you can judge what role gold can realistically play in your portfolio.
A company makes profits, a bond pays interest, a flat brings rent. Gold does none of that. It just sits there. Your gain can only come from someone paying you more for it later.
Why Gold Holds Value
Still, gold has been used to store value for thousands of years. It's scarce, doesn't rust, is accepted everywhere in the world and isn't tied to any government. In crises, when people trust currencies less, it often rises.
Gold is traded in dollars. So the price you see in euros also depends on currency risk (more on this in the lesson on currency risk). If gold rises five percent in dollars and the euro gets five percent stronger at the same time, you're left with roughly nothing. Sometimes the exchange rate cancels out moves, sometimes it amplifies them.
Long Dry Spells
The catch is the long dry spells. Anyone who bought at the peak in early 1980 was only back in profit in 2008, and after inflation in the red for much longer still.
Physical Gold
Physical gold costs a premium when you buy and has to be stored safely. In return you don't depend on any bank. Many people keep five to ten percent of their portfolio in gold, as a kind of insurance rather than to make money with it.
Because gold pays nothing out, its value can't be calculated from future income as with a share. The price comes from demand for jewellery, from industry, from central bank purchases and from investor demand. That last one depends heavily on real interest rates. When safe bonds pay noticeably more than inflation, it costs more to hold gold instead, which pays nothing. Then the gold price tends to come under pressure.
Gold in a Portfolio
In a portfolio, gold's use lies in its correlation with stocks. Over the long run the two move together only a little, and in some crises even in opposite directions. You can't rely on that. When everyone urgently needs cash, as in March 2020, gold gets sold too, because it's easy to turn into money.
Three Ways to Buy
You can buy gold in three ways: as bars or coins, through securities backed by real gold with a claim to delivery, or through futures. Bars and coins cost storage and insurance, and the gap between buying and selling price is large for small pieces. Securities are cheaper but, depending on how they're built, carry the risk that the issuer or custodian fails.
Summary
- Gold produces no income, its price depends only on demand.
- It can lose in real terms for decades.
- In a portfolio it helps because it moves differently from stocks, less because of its return.
Did you get it?
Why can't gold be valued like a share?
Because there are no payments from which a value could be calculated.
How do rising real interest rates affect the gold price?
Holding gold instead of an interest bearing investment becomes more expensive. That tends to weigh on the price.
What is gold good for in a portfolio?
For often moving differently from stocks. You shouldn't expect a high return.
Check your understanding
Your task
You hold gold worth €2,000. Gold rises 5 percent in dollars, and the euro gets 8 percent stronger against the dollar. Calculate what your position is worth in euros afterwards. Also write one sentence on where your gain from gold can come from at all.
Sources and further reading
- The World Gold Council explains the opportunity-cost mechanism: falling bond yields make gold, a non-yielding asset, more attractive, while rising real interest rates tend to weigh on its price. View source ↗
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