What is happening with gold price lately? At $ 4,000 per ounce, the gold price is at a historic high; in fact, it is the best year gold has had since 1979. This translates to more than 50% growth since the beginning of this year, and it could continue to grow.
So, what is going on? What is it that we know or don’t know? We do know that a rise in gold price has traditionally correlated with an increase in instability, because investors see gold as a safe-haven asset. It is also true that we are experiencing an instability bonanza, with geopolitical tensions, a weak US dollar, interest rate cuts, and concerns about tariffs, among other factors.
The thing is, amongst all this good news about gold price, two rather odd things are also happening. Firstly, the gold price is rising in an environment where stock markets have also been relatively strong. Secondly, it is also highly unusual that the US dollar falls at the same time as US government bonds are out of favour. One usually begets the other. Is it, therefore, a case of invest in anything but the dollar or US treasuries?
Given this unusual backdrop, how should we approach investing in gold assets? Well, it never hurts to start with getting some perspective. It pays to remember that with the gold price, the highs are exceptionally high and the lows are sudden, even with a slight shift in sentiment. It is especially true if the underlying driver of the price rise is investor fear rather than fundamentals.
The trouble is that the current momentum in gold price is emboldening more investors to join the fray, meaning this rally in price could last longer than we all think. Essentially, the ‘fear of missing out’ FOMO loop is firmly in place.
If we discount the noise, the question remains: should we join them and use gold as a tool for portfolio diversification, or be as sceptical as Warren Buffett, arguably one of the greatest investors of our time, and not invest in gold at all?
In his 2011 Berkshire Hathaway shareholder letter, Buffett described investing in gold as unproductive because “if you own one ounce of gold for an eternity, you will still own one ounce at its end.” It is, he writes, opposed to his preference for “investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment.”
In summary, what this all means is that investing in gold is akin to storing value, which is beneficial if you want to stay safe, whereas investing in other assets with yield capitalises on growth.
Whichever path you choose to take as an investor, we have five steps you need to take before making any investment.
1. Review your current financial position. What are your goals and priorities?
2. Understand your risk tolerance and ensure it aligns with your goals.
3. Think about investments as long-term commitments. The power of compounding is key to achieving long-term wealth.
4. Conduct thorough research and become familiar with the concept of portfolio diversification.
5. Speak to an accredited financial advisor
We are in for a bumpy ride. It is important to remember that the value of your investments can go down as well as up, and you may get back less than you initially invested. Invest wisely.
This article is not financial or personal advice. We are not financial advisers. The information contained in this article is designed for educational and informational purposes only. It is provided solely to enable you to make your own choices. Always remember that if you choose to invest, the value of your investments can fall or rise, so you could get back less than you invested. So, it is essential to seek advice from a qualified, authorised and registered professional. Note also that past performance is not a reliable indicator of the future performance of any investment.
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