Why would anyone want to invest in gold?

Analysis: gold doesn't generate any profits or interest income for investors, but its scarcity means it has always been seen as valuable

Humans have been buying and selling gold, using it as decoration or wearing it as a sign of wealth for over 6,500 years. That’s 2,000 years before the first pyramid was built in Egypt. Today, over 600 tonnes of jewellery are bought every year and $131 billion of gold changes hands every day in financial markets around the world.

The question is why? Owning a share in Microsoft will earn you dividend income as they return part of their profits. Investing in an Irish Government bond would give you about 3% interest each year. Gold doesn’t generate any profits or interest income for investors. It costs a small percentage to hold each year in storage and insurance costs to keep it in a vault or pay an exchange-traded fund to do it for you.

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From CNA Insider, should you invest in gold to hedge against inflation in 2023?

One reason put forward is that gold is incredibly scarce. All the gold that has ever been mined in history would add up to 208,874 tonnes and would only fill four Olympic swimming pools. Contrast this with copper where 22,000,000 tonnes was mined in 2022 alone, versus only 3,600 tonnes of newly mined gold. But while this is important, a lack of supply isn’t enough to explain paying over €1,700 for one troy ounce of gold – only a little bigger than a €2 coin in size. So who wants to own gold and why?

Investors and Central Banks

Investors tend to buy and own gold for two reasons. One is that gold has held its purchasing power over the longer term as inflation has eaten away at the value of other currencies over the centuries. Low-cost ways of buying and owning gold, such as exchange-traded funds, have allow many more small investors to buy gold since their inception in the early 2000s.

Secondly, having some gold in an investment portfolio helps to diversify away some of the risk of holding other financial assets. In normal times, gold’s price doesn’t move up and down in tandem with the prices of other assets. It also has the unusual feature of holding its value even in when markets are crashing - as they did during the global financial crisis – offering some insurance for your portfolio on those very bad days. This happens because gold is seen as a safe-haven during economic downturns. When investors are afraid to have their money at risk in the market, they park it in gold.

From Bloomberg Television, why central banks buy so much gold

Central banks own gold as it is an asset that isn’t controlled by any other governments, which means they can buy or sell to affect their economy or their exchange rate depending on their goals. Last year, central banks purchased a record amount of gold (1,136 tonnes), with the Central Bank of Ireland doubling its holding to 12 tonnes over the last two years.

'Consumers'

What makes gold unique as a financial asset is that investors also buy gold as jewellery, and not just as bars and coins to hold in a vault, or through an exchange-traded fund. Such buyers/consumers are not driven by the same concerns as the investors discussed above. They tend to buy when prices fall – acting as a brake on falling prices – with the aim of saving in gold rather than in a bank.

Over 60% of this demand comes from India and China, where there are long-standing traditions of gifting and saving in gold. While the consumption of gold jewellery in Western counties has fallen over the years as economies became wealthier, Asian demand has been consistent.

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This is one of the reasons investors are optimistic about gold as an investment in the long term. India and China are two of the largest and fastest growing economies around. As their economies grow, many expect that their gold consumption will rise too.

Couple this with the small amount of new gold being mined each year, and that gold mines may be exhausted by 2050, and you have a recipe for long term price increases as buyers bid up the price of an ever scarcer resource.

Risks for buyers

A risk to this investment thesis is that as Asian economies continue to grow, and it becomes easier for individuals to access financial markets, other investments will become more attractive. In this case, savings would get funnelled into equities, bonds, cryptocurrencies etc. and gold demand would weaken followed by prices.

But this trend of becoming more economically advanced and abandoning gold is not universal. After the global financial crisis, demand in Germany for all forms of gold increased and it's gone from almost zero prior to 2008 to Germany being the world’s fourth largest consumer in 2022. This is attributed to a reawakening of an historical distrust of banks and inflation fears in Germany.

How much is enough?

The problem for investors who decide to buy some gold is what proportion of their portfolio is appropriate. Too much and you may be missing out on the next boom in stocks or interest earnings from bonds; too little and another global financial crisis-like event could damage your wealth. There have been many academic studies on this and the consensus falls anywhere between 0.1 and 12% depending on the assumptions made, the country being examined and the data used.

But if a Bulgarian in one of Europe’s first urban settlements was investing effort and time into making gold beads 6,500 years ago, there has never been a time when gold has not been seen as valuable. It's not a massive leap to say investors won’t stop buying gold any time soon.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ

Why would anyone want to invest in gold?

Investors and Central Banks

'Consumers'

Risks for buyers

How much is enough?

More stories on

Fergal O'Connor