Anyone who decided to invest in gold early in 2024 was well-rewarded, and the global instability that so far defined 2025 has continued the yellow metal’s strong run.
For at least 6,000 years investing in gold has been seen as one of the surest ways of protecting wealth.
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With UK inflation surging to 3.6% in June and 3.8% in July, almost double the Bank of England’s 2% target, UK investors worried about the impact of inflation on their portfolios might be considering gold as one way of hedging against inflation.
"It's always a good time to buy gold," said Adrian Ash, director of research at BullionVault. "That might be for diversification, as risk insurance, an inflation hedge, a long term bull market, or because every time the stock market has lost value over extended periods of time (which is when it matters), the price of gold has risen."
Investing in gold has the potential to provide a source of growth as well as to protect the value of a portfolio. So is now the time to buy gold?
Why now might be a good time to buy gold
It can be tempting to steer clear of assets that have increased in value, on the basis that they are either overvalued or that it is now too late to take advantage of whatever factors caused their price to change.
When looked at historically, the returns investors can realise by investing in gold depend largely on when they buy in. Jim Reid, global head of macro research and thematic strategy at Deutsche Bank, says that there is “a peculiar story for the long-term investor where, depending on your starting point, gold has either seen significant outperformance or very subdued returns,” given its inflation-adjusted swings throughout the 1970s, 80s and 90s.
“Had you bought gold at its peak in 1980, you will only just have outperformed inflation today, 45 years later,” Reid explains. “By contrast, if you bought the S&P 500 on that day, it would have provided you with a stunning 4250% real return. However, had you bought gold in 2000, you would have comfortably outperformed the S&P 500 since.”
But the structural setup for gold looks appealing even given its outperformance over the last year.
Inflation is running high, particularly in the UK. But while the Bank of England appears to be hampered in its ability to lower interest rates, they are coming down in much of the rest of the world, particularly the US where the Federal Reserve (Fed) looks set to lower US rates this week.
That’s a bullish combination for gold. Higher inflation supports its role as a store of value, while the fact that it pays no interest is mitigated by reduced returns on offer from bonds.
“With inflation still simmering and central banks pivoting toward easing, investors are increasingly faced with a simple choice: ride the wave of asset inflation or stick with cash and risk being left behind,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.
Gold for diversification
One of the most compelling arguments for investing in gold is the diversification that it can offer to a portfolio.
“When bond yields stand at higher levels, shares and fixed income investments tend to track each other higher and lower,” says Tom Stevenson, investment director at Fidelity International. “That reduces the incentive to own a mixture of both bonds and shares. And it means that investors need to look further afield, into commodities and property, to gain that portfolio balance.”
Gold, by contrast, has “low-to-negative correlation to equities”, according to Raymond Backreedy, chief investment officer at Sparrows Capital. It also typically sees lower drawdown rates, which Backreedy says is “particularly desirable especially in times of market stresses”.
While it is of course not guaranteed to persist, there is some rationale behind the relationship.
“Historically, gold has a proven track record of performing well during economic uncertainty and global conflicts due to its intrinsic value, which is why many investors see gold as a safe haven,” said Rick Kanda, managing director at The Gold Bullion Company. “During times of conflict, investors steer away from investing in assets such as stocks and bonds, as geopolitical events often threaten the infrastructures supporting these assets.”
Is AI driving gold demand?
Often it’s the macroeconomic factors that determine the gold price, especially the rate of US inflation.
Gold is therefore often viewed as a commodity with no industrial applications, in contrast to silver which serves a multitude of important purposes in industry. Lots of investors in fact trade the two metals based on the gold-silver ratio which tracks the relative price of gold to silver. (At the time of writing, the gold-silver ratio is around 86; values above 80 have historically preceded strong rallies in the silver price.)
Gold is an important raw material in some industries though, one notable example being electronics. Gold is a superb conductor of electricity, and is therefore frequently used in high end electronic devices. There is almost certainly some gold in the device you’re using to read this article.
As prices rose between 2001 and 2011, electronics manufacturers sought ways to move away from gold, with demand for gold in electronics peaking in 2010.
However, according to the World Gold Council, artificial intelligence (AI) is helping to prompt a recovery in this market. The processors, memory chips and sensors which are being deployed at vast scale to build the data centres that train models like ChatGPT all use gold in their construction.
“Gold's superior conductivity ensures that data can be processed and transmitted at high speed with minimal energy loss,” wrote Louise Street, senior markets analyst and Trevor Keel, consultant, at the World Gold Council. “Furthermore, gold's resistance to corrosion ensures component longevity and durability – critical for continuous and intensive AI applications.”
Is now a bad time to invest in gold?
On the other side of the ledger is the fact that gold has seen a sustained period of gains, which might lead investors to consider whether it is a good time to buy gold.
Gold prices have gained 44% in dollar terms over the past 12 months, outperforming the S&P 500 during that time. Gold has also hit its all-time high in real terms during September, the first time this has happened since 1980.
Those who have held gold during this period could be tempted to take some profit on their gains by selling off a small portion of their allocation. Those who haven’t might feel that now isn’t the best time to dive in, given that gold is trading at almost the highest level in its history.
“Gold is an interesting investment at times of uncertainty but given its high price, a large amount of uncertainty and/or lower interest rates have already been priced in,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen.
Reid also points out that “it’s very difficult for gold to compete with equities over the very long run, given it pays no dividend. Its peak outperformance came when it was relatively cheap, and equities were relatively expensive. Today both are expensive versus history, so a very long-term investor would probably prefer equities.”
How much gold should you buy?
If you do decide that now is the time to buy gold, the final question is how much gold to buy.
Given the fact it pays no interest and has a historical tendency towards volatility, few experts advise investing a substantial part of your portfolio into gold.
When building multi-asset portfolios, “we typically allocate 3-10% [to gold] using the gold ETCs available on the market, depending on user case and overall percentage allocated to the defensive asset class”, said Backreedy.
“It's better to take a long term view on portfolio construction and outcomes, and from this perspective, gold can act as a compliment to fixed income from a defensive perspective and as a portfolio diversifier.
“As such, we look to the above benefits of gold over the long term, rather than focusing on the short term price.”
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