Gold Vs. Other Asset Classes: Comparing Returns & Risks
Overview of Gold Investment
Gold has been a highly sought-after asset class for centuries, renowned for its beauty, scarcity, and enduring value. It has been used as a medium of exchange and a store of wealth throughout history. Today, gold continues to be an attractive investment option for individuals and institutions alike.
One of the main reasons investors turn to gold is its ability to act as a hedge against inflation and economic uncertainty. When traditional currencies weaken or geopolitical tensions rise, gold often shines as a safe haven investment. It provides a sense of security and stability, as its value tends to hold up well during times of financial turmoil.
Investing in gold can be done in various ways. For those seeking physical possession, gold bars and coins offer a tangible asset that can be stored securely. Mutual funds and ETFs that own gold provide a more convenient way to gain exposure to the precious metal. Additionally, investing in shares of gold mining companies allows investors to indirectly participate in the potential upside of gold prices.
While gold investment has its advantages, it also has some drawbacks. Gold does not generate any income or dividends, unlike stocks or bonds. It also carries storage and security costs, especially for those holding physical gold. Additionally, the price of gold can be volatile, and its value can fluctuate in response to factors beyond an investor's control.
Looking ahead to 2024, the future of gold investment remains uncertain. It will largely depend on various economic and geopolitical factors, including interest rates, inflation, and global tensions. However, considering its historical track record and its enduring allure, gold is likely to continue exerting its influence as a valuable asset class.
Pros & Cons of Having Gold as an Asset Class
Investing in gold as an asset class offers several advantages and disadvantages that investors should consider. Here are the pros and cons of including gold in your investment portfolio
Hedge against inflation: Gold has historically been a reliable hedge against inflation. When the value of traditional currencies declines due to rising inflation, gold often maintains its purchasing power.
Diversification: Gold has a low correlation with other asset classes like stocks and bonds. By diversifying your portfolio with gold, you can reduce overall portfolio volatility and potentially enhance risk-adjusted returns.
Safe haven asset: During times of economic uncertainty and geopolitical tensions, investors flock to gold as a safe haven asset. Its perceived stability and enduring value provide a sense of security.
Liquid and globally recognized: Gold is a highly liquid asset and can be easily bought and sold globally. Its universal recognition and acceptance make it a desirable investment option.
No income or dividends: Unlike stocks or bonds, gold does not generate any income or dividends. It relies solely on price appreciation for growth, making it less attractive for income-focused investors.
Storage and security costs: Physical gold requires storage and security measures, which can result in additional costs. This is particularly true for larger gold holdings.
Price volatility: The price of gold can experience significant fluctuations, often influenced by factors beyond an investor's control, such as global economic conditions or geopolitical events.
Lack of control: As an investor in gold, you have limited control over the factors that determine its value. Market dynamics and external forces can impact the price of gold, making it unpredictable.
It's important to carefully weigh the pros and cons of gold investment before adding it to your portfolio. Consider your investment objectives, risk tolerance, and time horizon to determine if gold aligns with your overall financial strategy.
Gold vs Other Asset Classes
When it comes to investing, there are various asset classes to choose from, such as stocks, bonds, real estate, and commodities. One asset class that has stood the test of time is gold. While gold investment has its drawbacks, it also offers unique advantages that make it an attractive option for investors.
1-Gold is often considered a safe haven asset. During times of economic uncertainty or market turmoil, investors tend to flock towards gold as a store of value.
This is because gold has a long history of retaining its worth and serving as a hedge against inflation. Unlike paper currencies, which can be vulnerable to inflation and devaluation, gold has maintained its purchasing power over centuries.
2- Gold has a low correlation to other asset classes. While stocks, bonds, and real estate may experience ups and downs simultaneously, gold tends to move in the opposite direction. This means that incorporating gold into your investment portfolio can help diversify your risk and reduce volatility. By spreading your investments across different asset classes, you can potentially achieve a more balanced and stable portfolio.
3- Gold provides an excellent hedge against currency fluctuations. Since gold is traded in U.S. dollars, its value tends to increase when the dollar weakens. This can be particularly beneficial for investors who are concerned about the depreciation of their currency or wish to protect their purchasing power in international markets.
4- Gold offers liquidity and global market access. Gold is traded internationally, allowing investors to buy and sell it easily, regardless of their location. The gold market operates 24/7, providing ample opportunities for investors to enter or exit their positions at any time.
Gold Trading Vs Gold Investment
|Short-term profit through price fluctuations
|Long-term wealth preservation
|Short-term (days, weeks, months)
|Long-term (years, decades)
|Actively buying and selling for profit
|Buy and hold strategy
|Higher risk due to market volatility
|Lower risk, especially with physical gold
|Active involvement in market monitoring
|Passive, less time-intensive
|Speculation on price movements
|Capitalizing on gold's intrinsic value
|Derivatives, futures, options, CFDs
|Physical gold, gold ETFs, mining stocks
|High liquidity for short-term transactions
|Lower liquidity, especially with physical gold
|Transaction costs, spreads, and fees
|Initial purchase cost, storage fees (for physical gold)
|Ownership may not involve physical possession
|Physical possession or ownership through financial instruments
|Not applicable or digital storage for virtual assets
|Physical storage of gold (if owned physically)
|Typically, no dividends
|No regular dividends, value appreciation over time
|Capital gains tax may apply
|Tax implications may vary based on jurisdiction and form of investment
|Requires market timing skills
|Less dependent on market timing, focuses on long-term trends
|Often used as a part of a diversified portfolio
|Considered a diversification asset within a portfolio
|Profit generation through trading
|Wealth preservation, hedge against inflation and economic uncertainty
How to Invest in Gold?
Investing in gold can be a smart move to diversify your investment portfolio and protect yourself against inflation. When it comes to investing in gold, there are two main options to consider: shariah compliant gold exposure and non-sharia-compliant gold exposure. Let's explore both options in detail.
1-Shariah Compliant Gold Investment
For investors who want to adhere to Islamic principles, shariah compliant gold exposure is the way to go. This involves investing in gold assets that comply with Islamic finance guidelines.
Shariah compliant gold exposure ensures that the investment aligns with ethical and religious principles, such as avoiding interest-based transactions and speculative investments.
Investors can choose from various shariah compliant investment options, including gold-backed exchange-traded funds (ETFs), gold savings accounts, and physical gold with the necessary certifications.
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
2. Non-Sharia-Compliant Gold Investment
Investors who are not bound by Islamic principles can opt for non-sharia-compliant gold exposure. This provides them with a wider range of investment options, including gold futures,gold mining stocks& gold mutual funds.
Non-sharia-compliant gold exposure allows investors to take advantage of potential higher returns and more tailored investment strategies. However, it's important to note that these investments may come with higher risks due to volatility in gold prices and the performance of mining companies.
When considering how to invest in gold, it's crucial to do thorough research, assess your risk tolerance, and consult with a financial advisor.
They can help you determine the best option for your investment goals and guide you through the process. Whether you choose shariah compliant gold exposure or non-sharia-compliant gold exposure, gold can be a valuable addition to your investment portfolio.
2024 Expectation for Gold Investment
Gold has always been considered a reliable investment option, and its popularity is expected to continue in 2024. Here are some key expectations for gold investment in the coming year.
Safe Haven Asset: Gold is likely to maintain its status as a safe haven asset. Economic and geopolitical uncertainties can lead investors to seek the stability and security offered by gold. As we move into 2024, potential global events, such as trade tensions, political instability, or economic downturns, could increase the demand for gold as investors look for a store of value.
Rising Inflationary Pressures: Inflationary pressures are expected to continue in 2024. The loose monetary policies implemented by central banks around the world to counter the economic impact of the pandemic could potentially lead to inflationary concerns. Historically, gold has been used as a hedge against inflation, and this trend is likely to persist in the coming year.
Weakness in the Dollar: The value of the U.S. dollar is expected to face some challenges in 2024. Factors such as government debt, fiscal stimulus measures, and global economic conditions could put downward pressure on the dollar. As gold is traded in U.S. dollars, a weaker dollar could lead to an increase in the price of gold, making it an attractive investment option.
Central Bank Purchases: Central banks have been increasing their gold reserves in recent years, and this trend is anticipated to continue in 2024. Central banks view gold as a way to diversify their reserves and reduce reliance on traditional currencies. These purchases add to the demand for gold and can have a positive impact on its price.
Technological Advancements: The growing demand for gold in various industries, such as electronics and healthcare, is expected to drive its price up in 2024. With advancements in technology and the increasing need for gold in manufacturing processes, the demand for this precious metal is projected to rise.
As with any investment, it is important to conduct thorough research, stay informed about market trends, and seek professional advice when considering gold as part of your investment portfolio. While these expectations provide insights into the potential performance of gold in 2024, it is important to remember that the market can be unpredictable, and individual circumstances may vary.
Bullionvault, B.V. (2022) Why and when to hold gold bullion?,