The risks of investing in gold
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For centuries, gold has represented wealth and played a central role in the global financial system. Yet in today’s world — where payments are made with contactless cards and investments are executed through smartphone apps — it’s natural to ask: does investing in gold still make sense?
Although gold no longer dominates the monetary system as it once did, it continues to serve as a relevant asset for modern investors. It isn’t a vehicle for overnight wealth, but when allocated thoughtfully within a portfolio, gold can act as a hedge against inflation, help cushion losses during stock market declines, and offer a layer of protection during periods of financial instability.
And in keeping with the times, gaining exposure to gold no longer requires storing bars in a vault — it can now be bought and traded directly from your mobile device.
What makes gold so valuable?
The luster of gold has fascinated people since antiquity, but exactly what, besides its beauty, makes gold so special and valuable?
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One of the core reasons gold holds value is its scarcity. Since the dawn of civilization, humanity has mined fewer than 200,000 metric tons of gold in total. To put that into perspective, the world produces an equivalent amount of copper within just a few days — and the same volume of steel in roughly an hour. Extracting gold is both technically challenging and expensive; in some cases, several tons of ore must be processed to obtain enough metal for a single one-troy-ounce (31-gram) coin.
At the same time, gold reserves in the Earth’s crust remain sufficient to ensure a consistent, though limited, annual supply. In recent years, global production has averaged around 3,000 metric tons per year.
Beyond scarcity, gold’s durability is perhaps even more important. It is highly resistant to chemical reactions, meaning it does not rust, corrode, or decay over time. Unlike consumable commodities — such as agricultural products that are eaten or oil that is burned — gold is not destroyed through use. In fact, it is estimated that roughly 85% of all the gold ever mined still exists today in some form. Even when embedded in electronics or crafted into jewelry, gold can be recovered and recycled into new bars or coins.
Another defining characteristic is that gold cannot be manufactured through ordinary chemical processes. Unlike fiat currencies, whose supply can be expanded by central banks, gold’s availability cannot be easily increased. Additionally, it is extremely difficult to counterfeit convincingly, especially when compared to other assets such as artwork or paper money.
These combined traits — scarcity, durability, limited supply growth, and resistance to forgery — underpin gold’s enduring role as a store of value.
For these reasons, gold has long been regarded as a reliable store of value. Historically, a fixed quantity of gold has tended to preserve purchasing power over extended periods — meaning it could buy a comparable basket of goods and services across generations.
Because of its durability, scarcity, and universal acceptance, gold naturally evolved into a form of currency. It circulated directly as coins and later served as the benchmark against which paper money and base-metal coins were valued. When national currencies were backed by physical gold held in central bank vaults, the system was known as the gold standard.
However, as global economies expanded and required greater monetary flexibility, many countries moved away from the gold standard during the first half of the 20th century. Instead, numerous currencies were linked to the U.S. dollar, which itself remained backed by gold for a time. In 1971, the United States formally ended gold convertibility, effectively dismantling the last remnants of the gold standard. Since then, global currencies have operated as fiat money — deriving their value from government authority rather than a physical commodity — and exchange rates have been determined by market forces.
Even so, gold has not disappeared from the financial system. Many central banks continue to hold gold as part of their foreign reserve portfolios, primarily for diversification purposes alongside dominant reserve currencies such as the U.S. dollar and the euro. The United States maintains the largest official gold reserves, exceeding 8,000 metric tons. Germany, Italy, France, Russia, and China also hold significant quantities. In countries like the U.S. and Germany, gold represents more than 70% of total reserves, whereas in nations such as China and Japan, the proportion is considerably lower.
Although the monetary system has evolved, gold remains embedded in the structure of global finance.
The case for gold investment
Gold is often described as an asset that preserves purchasing power over long periods and is not directly tied to corporate earnings, cash flows, or economic productivity in the same way stocks or bonds are. Before looking at the practical ways to invest in gold, it’s worth understanding how these characteristics can work in your favor as an investor.
Protection Against Inflation
One of the clearest reasons to hold gold is as a hedge against inflation and currency erosion. When the general price level rises and the value of money declines, investors frequently shift toward tangible assets that are perceived to retain value over time — such as gold, real estate, or collectibles.
Among these “hard assets,” gold stands out for its practicality. It can be bought in small denominations, is relatively easy to store or trade, and does not depend on location or rental income, unlike property. When inflation accelerates, demand for gold often increases, potentially lifting its price and helping offset the declining purchasing power of other assets in your portfolio.
Because gold is typically priced in U.S. dollars, a weakening dollar can also support higher gold prices. When the dollar falls, gold becomes more affordable for non-U.S. buyers — including foreign investors and central banks — which can boost demand. That said, the relationship is not mechanical; there are periods when both gold and the U.S. dollar rise simultaneously.
Inflation is often linked with rising interest rates, but gold can remain relevant even in low- or negative-rate environments. When bond yields approach zero or turn negative, the fact that gold does not generate interest becomes less of a drawback. In fact, historical data suggest that gold prices have frequently moved in line with the growing volume of negative-yielding debt globally.
Safe-Haven Characteristics
Gold is also commonly viewed as a defensive asset during market stress. When stock markets decline sharply, or when geopolitical tensions and financial instability increase, investors often seek refuge in gold. During the global financial crisis of 2007–2009, for example, concerns about the broader financial system reinforced gold’s appeal.
However, like any form of protection, timing matters. Gold’s safe-haven qualities are most beneficial when exposure is built gradually during stable periods — not when panic is already widespread. Waiting until markets are in free fall to accumulate gold may mean that much of the price adjustment has already occurred.
In short, gold can play a stabilizing role within a diversified portfolio — but its effectiveness depends on thoughtful allocation and long-term planning rather than reactive decision-making.
The risks of investing in gold
The saying “all that glitters is not gold” applies to investing as well. Although gold is often praised as a hedge against inflation and market turmoil, it doesn’t always perform as expected — and it may not consistently align with every investor’s objectives.
Short-Term Price Volatility
One key drawback is that gold prices can be highly volatile in the short run. The investment gold market is relatively concentrated, with large central banks and major gold-focused funds accounting for a significant share of activity. A limited number of sizable transactions can meaningfully influence the spot price.
While volatility is common across financial markets, it can feel counterintuitive when it affects an asset that many investors rely on specifically for stability.
Long-Term Performance vs. Stocks and Bonds
Gold’s long-term return profile has also been debated. Historically, diversified stock and bond portfolios — especially when dividends are reinvested — have often outpaced gold over extended periods. This has led some analysts to question whether gold is essential in a long-term growth-oriented portfolio.
A major reason for this difference lies in gold’s nature. Unlike equities, gold does not generate earnings, pay dividends, or benefit from innovation and business expansion. It is a non-productive asset, meaning its value depends purely on supply and demand dynamics. In contrast, companies can grow revenue and profits, creating compounding returns over time.
An Imperfect Safe Haven
Gold is also not a flawless defensive asset. Only about 40% of gold demand comes from investment purposes, while roughly 50% is driven by jewelry and 10% by industrial applications such as electronics. Because jewelry and industrial demand are tied to economic conditions — particularly in major markets like India — gold does not always move independently of broader economic cycles. This can dilute its counter-cyclical qualities.
Not the Only Defensive Choice
Gold is just one potential safe-haven option. Other assets may provide stability with lower volatility or complexity. Examples include:
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Defensive equities (such as utilities or consumer staples)
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Safe-haven currencies like the Swiss franc
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Short-term U.S. Treasury bills
Gold is also not the only way to hedge inflation. Inflation-linked bonds, such as Treasury Inflation-Protected Securities (TIPS), adjust their principal value with inflation and may offer more predictable protection — sometimes with lower price swings than gold. In certain jurisdictions, they may also provide tax advantages compared to precious metal investments.
In short, while gold can play a role in diversification and risk management, it is not a universal solution. The right allocation depends on your time horizon, risk tolerance, and overall financial strategy.
- So what is the ideal role of gold in an investment portfolio? Lacking long-term growth potential and often moving in an opposite direction than the rest of the market, gold is probably best used for diversification – helping you mitigate losses and preserve the value of your holdings even in the face of adverse conditions.
How to invest in gold and how much to hold of course depends on your time horizon, investment goals, and the composition of the rest of your portfolio. Most experts discussing how to invest in gold will advise you to keep a few percent, but probably no more than 10% of your holdings in gold. For example, veteran hedge-fund manager Ray Dalio’s All Weather Portfolio – one of the best-known examples of a diversified, recession- and inflation-proof portfolio – calls for a 7.5% share of gold, in addition to 40% long-term bonds, 30% stocks, 15% intermediate-term bonds and 7.5% commodities.
How to buy gold
How to invest in gold? There are several ways to do so, from buying the actual thing in physical form, to buying a piece of paper that represents gold, or buying into a fund that tracks a stock index of companies that are active in gold mining. Each comes with their own benefits and risks, so it makes sense to weigh your options and risk appetite before committing any funds.
ETFs and mutual funds
The most convenient way of investing in gold is via gold-based exchange-traded funds (ETFs) or mutual funds. The most straightforward gold ETFs basically work like “gold stocks” – instruments that replicate movements in the price of gold and can be traded on an exchange like any regular stock.
Not all gold ETFs invest in physical gold only; underlying assets may also include gold futures contracts or may track gold mining company stocks. Check out this article for a detailed breakdown of investing in gold-related ETFs and mutual funds.
Mining company stocks
A good way to gain exposure to gold as an investor is to buy shares in gold mining companies. There are hundreds of publicly-listed gold miners to choose from, from global behemoths to small-cap firms still focusing mostly on exploration; and their shares can be easily bought or sold on any online broker platform. Go here to read about the benefits and hazards of buying into these companies.
Physical gold
The most traditional way to buy gold is in physical form, in the shape of solid gold bars or coins. Special cases of physical gold investment include jewelry and numismatic coins. We collected the most important aspects of investing in physical gold in this article.
Gold futures
Gold futures are another, more sophisticated way to bet on movements in the price of gold. These are contracts to buy or sell gold at an agreed price at an agreed time (though actual delivery rarely takes place). As these contracts involve trading on margin and therefore may lead to sizable losses, they are not recommended for any but the most experienced and risk-tolerant retail investors.
FAQ – the bottom line on gold
How do I buy shares in gold?
The most convenient way to buy into the gold market is to invest in gold-based ETFs (exchange-traded funds), preferably ones that hold only physical gold as an underlying asset. Some people consider buying gold bars or coins a safer option, but this involves higher costs and more hassle.
When do gold prices rise?
As gold is widely considered a “safe haven,” investor interest in gold (and therefore its price) tends to rise in times of uncertainty or a stock-market downturn, such as those brought on by the Covid-19 pandemic in the first half of 2020.
What was the highest price of gold in history?
In absolute terms, the highest gold price was $2,067.15/oz in August 2020, at a time of global economic uncertainty and US dollar weakness. When adjusted for inflation, gold prices topped out at the beginning of 1980 (at more than $2,200/oz in today’s dollars), amid serious geopolitical conflicts and runaway US inflation.
Why was gold so cheap in 2000?
The price of gold bottomed out at about $260/oz in 2000. This was because of a booming stock market (the infamous dot-com bubble) and a strong US dollar, both of which tend to weaken demand for gold. Demand for gold from Asian investors was also low, as the region was still reeling from the 1997-98 Asian financial crisis.
Is gold safer than cash?
Gold keeps its value better than cash, which is vulnerable to inflation or currency devaluation. However, gold – especially in physical form – can be costly to hold; short-term price fluctuations may be considerable; and the price of gold may fall if the economy or the stock market are booming. For these reasons, gold may serve you best as part of a diversified portfolio of assets.