With its price up nearly 19% this year compared to the US stock market (S&P 500) at 7.49% at the time of writing, you will find many headlines saying that you should invest in gold in 2023.
These headlines have increased over the last month as turbulence in the stock market has caused the S&P 500 to decline nearly 4% whilst gold is up just over 6% and coming close to reaching its all-time high.
As with any investing decision we shouldn’t be focusing on the short term but the long-term impact. How is this investment going to help us achieve our goals?
Why would anyone actually invest in gold? It’s not a business producing income, it’s just a metal.
A quick look through the internet and you will find that three of the most common reasons people invest in gold is because:
- It’s seen as a safe haven.
- It’s a good hedge against inflation.
- It reduces the overall volatility of a portfolio.
Let’s explore these reasons in more detail to see if you should invest in gold in 2023.
Gold as a safe haven
When investors talk about a safe haven, they believe their investment will increase or retain its value during market turbulence.
So, through events like wars, economic depressions, banking crises etc where stock markets crash, some investors will sell out of their stocks and move into gold hoping it will keep them in positive return territory.
There is definitely evidence that supports the view that gold can produce positive returns during significant stock market events.
If we look back through the last 50 years of recessions and pull out a few examples, we can see that you would have done quite well holding gold instead of stocks.
It’s not a given that this trend always happens though. During the 1980 recession gold was actually down 5.1% whilst the S&P 500 was up 6.6%.
It’s actually in more recent times since the 2007 great financial crises that there has been a surge in the price of gold.
If you are planning to try and time the point at which you sell stocks and buy gold, then think again. This is incredibly hard to do and quite often the gold price falls sharply once the recession is over and the market has already recovered so you could end up selling your gold at a low point and buying back into the stock market at a high point.
Gold as a hedge against inflation
Many believe that investing in gold is a good way to ensure their money keeps pace with inflation and maintains its purchasing power.
Remember, if your return on cash or an investment doesn’t beat inflation then you are actually losing money in real terms.
If we look back over the last 100 years gold has definitely beaten inflation. However, if we analyse each decade in isolation over the last 100 years, we can see that gold doesn’t consistently beat inflation.
What’s interesting is that investing in the global stock market has actually provided a better chance of beating inflation than gold.
The chart below shows the percentage of times different investments beat inflation over rolling 5-, 10- and 20-year periods from 31st January 1975 to 31st October 2021.
We can see that over a 20-year period which is probably the minimum amount of time someone retiring is going to invest for, global equities have a 100% record of beating inflation whereas gold has only a 54% chance.
Gold reducing volatility
Diversification is often said to be a great way to reduce the overall volatility of your investment portfolio.
This means investing into lots of different asset classes like cash, equities (stocks), bonds and property in the hope that if one asset goes down, another will go up to even things out.
Some investors will add gold to their portfolio alongside assets like stocks and bonds for further diversification.
Looking at the same period as with the inflation data above we can see that gold has actually seen higher volatility than global stocks.
Source: Vanguard/Timeline
A common ‘balanced’ portfolio mix would be the 60/40 approach. 60% allocated to stocks and 40% to bonds. If we reduced the exposure to these assets proportionately by 10% and then added 10% to gold the results show that over the last 10 years you would have seen a very minimal reduction in volatility.
8.3% volatility for the portfolio without gold and 8.0% volatility for the portfolio with gold.
So, there’s really not much in it.
To conclude, it’s not about whether you should invest in gold in 2023, the real question is whether you should invest in gold at all.
We would suggest that if your priority was reducing your overall risk and volatility of your investment portfolio then holding some gold over the long term may give you some small benefit.
However, if your overriding objective was to achieve the best returns over the long term then a portfolio of global equities without gold has proven to be the best option based on past evidence. Of course, there is no guarantee to what lies ahead.
Source: Timeline
If you would like to ensure your investment strategy is right for your retirement then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the outcome you desire. We have created hundreds of happy and protected retirements over the years. This could be you too.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
