Is now a good time to invest in gold?

Given the uncertainty that pervades the UK and international markets at present, investors could be forgiven for asking themselves if now is a good time to invest in gold.

For at least 6,000 years investing in gold has been seen as one of the surest ways of protecting wealth. With inflation bouncing back above the Bank of England’s 2% target in October, 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," Adrian Ash, director of research at BullionVault, tells MoneyWeek. "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."

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According to Johanna Kyrklund, group chief investment officer at Schroders, all portfolios ought to include at least a small allocation to gold.

"In general, gold is a good store of value, particularly given the profligate policies pursued by all the major governments," she told a webinar on 21 November.

Kyrklund recommends that approximately 2% of a portfolio be allocated to gold. "The point is, a lot of investors have none," she added.

Gold prices have risen 32% so far this year, underscoring the yellow metal’s potential to act as a source of growth as well as a protector of value within a portfolio.

Drivers of the gains have included global uncertainty, particularly in light of the conflict in the Middle East and the runup to the US presidential election, as well as gold purchasing by governments and central banks.

“There has apparently been some sustained buying of gold by the Chinese authorities in an effort to reduce their reliance on the US dollar amid the fractious relationship between the two countries,” says Richard Hunter, head of markets at Interactive Investor. “Other central banks have also been adding to their gold holdings.”

Can gold diversify my portfolio?

According to Kyrklund, now is a good time to invest in gold because it offers better diversification from equities when compared with bands.

“Generally, it looks like a correlated market between stocks and bonds,” she said.

Gold, by contrast, is less correlated with stocks. While both the S&P 500 and gold prices have posted 30%-plus gains over the past 12 months, they have frequently moved in opposite directions.

This inverse correlation stretches back decades.

While it is of course not guaranteed to persist, there is some rationale behind it. Equities typically gain in value during market upturns, and decline during downturns. During these downturns, people aim to put their money into the safest store of value possible, and there are very few safer stores of value (historically speaking) than gold.

Is AI driving gold demand?

Often it’s the macroeconomic factors that determine the gold price, especially the rate of inflation (particularly of the US dollar).

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 time of writing, the gold-silver ratio is around 87; values above 80 have historically preceded strong rallies in the silver price.)

Gold is, though, an important raw material in some industries, 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 last week. “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 if now is the right time to buy.

Gold prices have gained 36.5% in dollar terms over the past 12 months, outpacing the S&P 500 during that time. Gold is currently trading at close to its all-time highs – and “all-time”, for gold, goes back a long way.

"Gold's current record-breaking bull market has clearly pulled in speculative traders betting that these price gains will continue," says Ash.

Those who have held gold during this period could be tempted to take some profit on their gains by selling off a 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.

The caveat to this is that, over the millennia it has been traded, gold has consistently trended upwards over the long run. In other words, gold is often trading at all-time highs, and when it drops below them, it usually comes back to exceed them again eventually.

Runs like these are never guaranteed to last into perpetuity, but in gold’s case, there is a lot of trading history to look at, and it mostly goes in one direction.

As Ash puts it: "For new investors, the price you missed doesn't matter. What counts for today's buyers is what gold's track record says it could do when the next crisis strikes."