Investing in gold? Five questions, five answers
Investors like to include precious metal in their portfolios. But why is gold currently so popular that it is constantly reaching new record highs? Read on for the answers to the most important questions and to find out why you shouldn't be too dazzled.
Cyrill Staubli and Jonathan Hopff
What opportunities does gold offer?
Gold has always been a symbol of wealth. But could investing in gold – especially given the sharp rise in prices in recent months - lead to financial prosperity?
This is supported by ...
- In the long term, gold has proven to be a stable investment, especially in times of economic uncertainty and high inflation, when it becomes more attractive. Conventional wisdom says that even if the Swiss franc and the US dollar lose value, one ounce of gold will always be worth the same. The following chart impressively illustrates gold's ability to preserve value as an investment. The nominal gold price has increased significantly since 1976, mainly due to inflation and the depreciation of the US dollar.
Chart 1: Nominal and real gold price in USD/oz (basis: 1976)
- Gold tends to have a low or negative correlation with traditional asset classes, such as equities and bonds. This means that adding gold to a portfolio can improve its risk-return profile by reducing the overall risk.
However, against this argument is the fact that...
- Unlike shares and bonds, however, gold does not generate any regular income. Investors can therefore only benefit from price increases.
- A look at the nominal price trend in US dollars shows that the gold price has fluctuated considerably in recent decades. Between 1980 and 2007, for example, it did not generate any significant returns. Investors had to wait 27 years for their investment to yield a positive return. Such extended phases of value stagnation are rarely observed with shares. Over long periods of time, the real price of gold has risen less dramatically than the nominal price. This demonstrates that, while gold has maintained its value, it has not necessarily generated above-average returns compared to other investments, such as shares or property.
Conclusion:
Gold can play a role in a well-diversified portfolio.
What is driving the gold price?
We consider the five main factors that influence the gold price.
These factors are also reflected in the study by Dirk G. Baur, a professor at the University of Technology Sydney, titled Gold – Fundamental Drivers and Asset Allocation.
Several key factors influence the price of gold:
- Inflation: Historically, inflation has been a significant driver of the gold price, particularly in the 1970s and late 2000s. In times of high inflation, the price of gold rises as it serves as a hedge against inflation.
- Interest rates: High interest rates increase the opportunity cost of holding gold, which tends to lead to a fall in its price. However, low or negative real interest rates (i.e. nominal interest rates minus the inflation rate) favour an increase in the gold price.
- Currency changes: The value of the US dollar significantly impacts the price of gold. A weaker dollar generally leads to a higher gold price, as gold is traded in US dollars, making it more attractive to investors using other currencies.
- Central bank reserves: Central bank policy, particularly with regard to the accumulation and expansion of gold reserves, plays an important role. In recent years, central banks, particularly in emerging markets, have increased their gold reserves, thereby supporting the gold price.
Conclusion:
The influence of these factors varies over time. For instance, real yields and the gold price have become somewhat decoupled since the conflict in Ukraine. During this period, structural gold purchases by central banks (diversification away from the US dollar) were one of the factors contributing to the rising gold price. Furthermore, the last few years have shown that the gold price is affected by various factors, such as investor demand (as seen in gold ETF holdings) and trader positions ('non-commercial positioning').
I want to buy gold. What options do I have?
Several...
- Physical gold: You can own gold bars or coins directly.
- ETF (Exchange Traded Fund): Simple trading on the stock exchange.
- ETC (Exchange Traded Commodity): Specifically for commodities such as gold.
- Currency XAU: trading in gold as a currency unit.
- Futures: Contracts for the future purchase or sale of gold.
A detailed analysis and further information can be found in the blog article 'Many roads lead to Rome'.
What about sustainability?
Gold has previously been criticised due to sustainability issues. Industry standards and quality seals have therefore been developed to create an international framework.
- Supranational recommendations: Frameworks such as the United Nations Global Compact and the OECD Guidelines promote sustainable trade and reduce the trade of conflict minerals.
- Industry standards: Guidelines such as the LBMA's Responsible Gold Guidance and the World Gold Council's Conflict-Free Gold Standards set minimum standards for responsible gold trading.
- Seal of quality: Initiatives such as Fairtrade, Fairmined, the Swiss Better Gold Association and Green Gold certify gold from sustainable and ethical sources.
- Recycled gold: Reprocessing gold from jewellery and electronic scrap is considered a more environmentally friendly alternative, with re-melting being particularly beneficial.
A detailed analysis and further information can be found in the blog article 'How sustainable is gold?'
Where will the gold price be in five year's time?
Forecasts are tricky, but we will attempt one using the price drivers defined in question 2 and simplified assumptions, while also assuming that all four factors impact the gold price over the next five years.
| Influencing factor | Influencing factor5-year perspective | Our current assessment of the change in the gold price |
|---|---|---|
| Inflation | Higher inflation in sight Now that US inflation has been falling since its mid-2022 peak, several challenges are looming in the coming years: 1. Increased import duties: Further increases in government spending will boost demand for goods and lead to rising prices. It follows from 1 and 2 that a US recession within the next five years cannot be ruled out. |
positive |
| Interest rates | Between inflation and the economic situation Interest rates are significantly influenced by inflation and the future direction of the economy. Increased trade tariffs are likely to lead to higher inflation over the next five years, but they will also weaken economic performance. Therefore, the US central bank will probably have limited scope for adjusting interest rates in the near future. In the long term, interest rates will also be caught between higher inflation risks and a weakening economy. |
neutral |
| Currency change | Overvalued USD Current forecasts suggest that political measures such as Trump's favoured weakening of the dollar could affect confidence in the US currency. Historically, the dollar has been overvalued (see the chart below). According to the purchasing power parity index (PPP), the dollar is overpriced compared to many other currencies, meaning that goods and services are more expensive in the US. |
positive |
| Central bank reserves | Central banks are considering gold purchases Due to the de-dollarisation trend, it is likely that central banks will continue to demand gold over the next few years before stabilisation sets in. Gold's share of total currency reserves remains relatively low, particularly in Asia (e.g. the People's Bank of China). |
very positive |
Chart 2: The purchasing power parity index (PPP) shows that the dollar is overpriced compared to many other currencies.
Conclusion:
In summary, we anticipate a rise in the price of gold over the next five years, potentially reaching USD 5,000/oz. However, the journey there will certainly not be straightforward, but will instead be characterised by volatility and short-term corrections.
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Last updated: March 2025