In March we delved into investing in gold. It’s up more than 25% since that time. After a blistering run, what role should gold play in your portfolio?
Many people’s exposure to gold has significantly increased as its price has rocketed. Other major precious metals (that is, silver, platinum and palladium) have experienced similar rises in the second half of this year.
Gold may be a store of value – but it can be just as volatile as other types of asset. On 21 October it experienced a one-day drop of 5.3%, its biggest drop in half a decade. It fell further the following day.
Remember gold doesn’t grow or pay dividends. It is there as a hedge against other assets, not purely as an investment in itself.
What’s driving the gold price?
Several factors have driven the rise in the price of gold. Global instability in politics, from on-off tariffs, war in Ukraine, Gaza, Sudan and elsewhere, to climate concerns, are driving a flight to safety.
Fears around currency debasement and devaluation, particularly the US dollar (including threats to US Federal Reserve’s independence) are also increasing interest in gold. Unlike a fiat currency, you can’t print more gold. Central banks globally have increased gold purchases over the last three years. And the difficulty in increasing supply is a growing factor as mining industry practices become more restrictive.
Other commentators have linked gold’s strong run as a hedge to concerns around AI and wider stock market valuations.
Lastly, a weaker US dollar versus other currencies has made the rise in gold less steep for Euro and other buyers, because gold is priced in dollars.
So should you sell gold?
Some of the changes driving the gold price look long-term: for example, global instability, and the era of low interest rates and money printing. That could sustain prices around the current $4,000 level.
But it seems likely that the best of the price increase has been had. For example, the jewellery market, accounting for around 40% of gold demand, is seeing signs of alternatives being used and demand decreasing, arising from the price changes.
If your position in gold has come to dominate your portfolio, now could be time to adjust. Like any other asset, gold can be volatile, and endure long periods of low- or no growth. At most a small allocation is appropriate (5-10% of investible wealth for most investors).
