Gold as an Asset Class

Jul 31, 2023

Gold is the longest-standing asset class, operating for over 4000-years (Bromberg, 2023). Although gold has other uses, around 95% of gold is used as a store of value (Bullionvault, 2022) . Previously the gold standard was used as a currency whereby physical bullion could be exchanged for cash at given rates of exchange. However, this was replaced in the 1930s due to soaring inflation. More recently, gold continues to act as a store of value and a hedge against inflation in investors’ diverse portfolios. Gold has maintained its purchasing power and is globally traded, contributing to its success. Due to this, the World Gold Council recommends exposure from 3% to 7% in a portfolio to increase risk-adjusted returns (Sourbes., 2021).

When evaluating gold as an investment, returns are yielded through price appreciation of the asset rather than a given yield. Although some consider gold to be a non-productive asset based on the fact a constant yield is not provided, there are merits of holding gold in a portfolio. Gold has achieved an annual return of 10.61% between January 1971 and December 2019 (Statista, 2023) demonstrating its attractiveness as an asset class, which is only marginally lower than returns in equity markets. The price of gold has no intrinsic value, therefore price appreciation is driven by a number of macroeconomic factors. 

Gold prices are affected by macroeconomic conditions such as interest rate changes. Investors should consider the effects of interest rates on this asset class, leading to capital flows both to and from gold. Rising interest rates often create headwinds for gold through an increase in the risk-free rate, making investments in debt more attractive. However, as the hawkish policies of 2022 are somewhat priced in, alongside continued inflation and geopolitical uncertainty, there remains strong demand for gold as a hedge in 2022. 

Another factor determining the capital appreciation of gold is its ability to hedge against certain market conditions. Cash holdings are often converted into gold to protect against the devaluation of the purchasing power of the currency. In turn, this drives up the price of gold demonstrating the ability to hedge against Inflation. Gold has historically performed well amid high inflation. In years when inflation was higher than 3%, the price of gold has increased by an average of 14% (Goldhub, 2022). Whilst other cyclical asset classes suffer, gold has outperformed as it has acted as a hedge to certain market conditions. For example, gold has shown a 0.00 monthly correlation to the S&P 500 Index since the 1970s (ssga, 2023). 

Different ways to invest in gold:

There are numerous ways in which one can invest in gold, whether that be through physical or online ownership. I argue that only a few of these are sound investments as part of a diversified portfolio of investments, and fewer still are options which are permissible for Muslims. One can hold actual gold through ETFs or hold it physically. Other non-sharia compliant methods include futures, options and other derivative products.

Sharia-Compliant Gold Exposure: 

One way to gain exposure to gold is by buying physical gold online which is stored safely. Holding physical gold allows for exposure to the asset class allowing for investing in gold bullion, yet this comes with both storage costs and there is always a 5-10% premium to spot prices which can erode gains in real terms from price appreciation. 

Another sharia-compliant method to gain exposure to the gold asset class is through gold ETFs. These are ETFs which actually hold gold rather than creating the same effect via holding gold futures and options. Gold-backed ETFs replicate the price of gold bullion held in bank vaults and are backed by physical exposure. By investing in gold ETFs, investors can put their money into the gold market without owning the physical commodity. ETFs provide a flexible method in which fractional investing can take place, whilst still allowing for diversification for an overall portfolio.  

Two popular ETFs which operate in this manner are ‘Aberdeen Standard Physical Gold Shares ETF (SGOL)’ and ‘WisdomTree Physical Swiss Gold (SGBX)’. Both options are backed by physical gold in a cost-efficient manner, providing returns equivalent to the movement of gold. The physical gold is held by JPMorgan Chase Bank vaults. Moreover, both ETFs comply with rules for delivery ensuring Sharia compliance of the ETF.

Non-Sharia-Compliant Gold Exposure: 

There are other methods through which one can access gold as an asset class. By investing in gold ETFs that trade in futures or options, one would be operating outside the realms of Shariah compliance. Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. They are considered haram as they are based on ambiguity and not upon mutual benefit, a tenet of Islamic finance. Futures transactions obligate parties to sell at an agreed-upon price and date. However, forward-selling is forbidden as the object of sale must be in possession of the owner at the time of sale- a requirement not met by futures contracts. Therefore, holding gold ETFs that trade futures or options is not sharia-compliant. 

The Bottom Line:

Gold has historically improved risk-adjusted returns, delivered positive returns, and provided liquidity in a diversified portfolio of investments. By acting as a store of value and hedge against inflatiom, gold has maintained its purchasing power. Despite this, gold is affected by macroeconomic conditions, particularly changing interest rates which may increase or decrease the relative attractiveness of other investments. Due to this, gold performs best when held in the long-term to avoid market cyclicality, and when held as a minority 3% to 7% stake in a portfolio. This means, if gold prices increase, one should consider readjusting their portfolio weightings to fall within these weightings.


  • Bromberg, M. (2023) Why has gold always been valuable?, Investopedia. Available at: https://www.investopedia.com/articles/investing/071114/why-gold-has-always-had-value.asp (Accessed: 31 July 2023). (Bromberg, 2023)
  • Bullionvault, B.V. (2022) Why and when to hold gold bullion?, BullionVault. Available at: https://www.bullionvault.co.uk/gold-guide/why-gold#:~:text=While%20paper%20money%20forms%20disappear,has%20lasted%20those%204%2C000%20years (Accessed: 31 July 2023). (Bullionvault, 2022)
  • Statista Research Department, S.R.D. (2023) Gold vs other assets: Average returns 1971-2022, Statista. Available at: https://www.statista.com/statistics/1061434/gold-other-assets-average-annual-returns-global/ (Accessed: 31 July 2023). (Statista, 2023)
  • S.S.G.A. (2023) Gold as a strategic asset class, State Street Global Advisors. Available at: https://www.ssga.com/us/en/intermediary/etfs/insights/gold-as-a-strategic-asset-class (Accessed: 31 July 2023). (ssga, 2023)
  • Goldhub, G. (2022) Gold mid-year outlook 2022, World Gold Council. Available at: https://www.gold.org/goldhub/research/gold-outlook-2022-mid-year (Accessed: 31 July 2023). 
  • (Goldhub, 2022)
  • Sourbes., C. (2021) Portfolios can improve risk-adjusted returns with gold allocation – report, IPE. Available at: https://www.ipe.com/portfolios-can-improve-risk-adjusted-returns-with-gold-allocation-report/42617.article (Accessed: 31 July 2023).  (Sourbes., 2021)