Investing is an industry full of competing philosophies, strategies, and debates. One of the more enduring and polarising topics is whether or not gold deserves a place in your portfolio. Opinions on gold as an investment tend to resurface each time its value rises sharply, as it has in recent years.
But is gold truly the safe haven it’s often claimed to be, or is this allure just a golden illusion?
The Case for Gold
Gold has held value across centuries, admired for its lustre, durability, and versatility. Beyond its beauty, gold is exceptionally useful in industries like electronics, medicine, and aerospace, where its properties as a conductor, its resistance to rust, and its stability at high temperatures make it invaluable.
This steady demand lends it a certain appeal to investors looking for something with staying power. Remarkably, if measured in gold, the pay of a Roman centurion 2,000 years ago is similar to that of a modern-day U.S. Army captain—a testament to gold’s historic preservation of purchasing power.
For investors, gold also offers uncorrelated returns compared to traditional assets like stocks and bonds, making it a popular tool for diversification. Often viewed as an “Armageddon hedge,” gold tends to perform well when confidence in the financial system is low, providing a sense of security when other investments falter.
Compared to complex assets, gold’s value is relatively simple to grasp—it’s just a metal with a market price that can be easily accessed through physical purchases or low-cost funds.
The Downside of Gold
However, despite its enduring allure, gold has several drawbacks as an investment. Its price is driven purely by supply and demand, and gold doesn’t produce income or dividends. Unlike stocks or bonds, which generate returns through company profits or interest payments, gold’s value rests entirely on the hope that others will want it more in the future.
And this expectation can lead to volatility, especially in times of crisis.
As the chart below illustrates, an ounce of gold bought in 1926 for around $20 would be worth just over $2,500 today. While this may seem impressive, the story changes when compared to global equities over the same period.
If invested in global stocks, that same $20 would have grown to nearly 50 times the cumulative gain achieved by gold, reaching an extraordinary value of $120,924. Gold’s long-term return has historically hovered around that of cash—hardly the growth engine that many investors seek.
For those seeking an “Armageddon hedge,” relying on the financial system to secure gold-backed funds or ETFs can feel contradictory. While owning physical gold is possible, it introduces its own set of issues, including storage challenges, insurance costs, and risks like theft.
And although gold is sometimes promoted as a hedge against inflation, the evidence for this is inconsistent. Gold has preserved its value over centuries, but its performance is far less impressive over more relevant timeframes.
For example, since its inflation-adjusted peak in February 1980, gold’s value in U.S. dollars has yet to recover, even experiencing an 83% drop over the two decades following that peak.
Gold’s Role in Your Portfolio
Deciding if gold deserves a spot in your portfolio is a task left to a thoughtful investment committee such as the one that meets every 90 days at Capital.
Each asset class in a well-structured portfolio should serve a distinct purpose, and while gold is attractive in certain scenarios, it doesn’t necessarily meet the growth goals most investors have.
At Capital, we approach portfolio construction with a clear objective: to maximise returns while managing risk. Each potential investment is evaluated not only on its own merits but in the context of the entire portfolio.
Gold may offer some benefits, like diversification and a degree of stability during economic downturns, but the question remains: are there better options?
For most clients, the answer is yes. While gold can play a niche role in reducing volatility or acting as a hedge during extreme market conditions, other asset classes often provide similar benefits with better returns.
Long-term growth and income generation typically come from stocks and bonds—assets that grow alongside the economy and reward patience with compound gains.
The Bottom Line: A Balanced View on Gold
Gold is undoubtedly alluring, with a unique position as both a precious metal and an investment. It has a timeless appeal that few other assets can claim, but this allure can sometimes overshadow its limitations.
When weighed against other assets, gold’s lack of income generation, storage costs, and mixed inflation protection make it less compelling as a core investment.
Instead, consider gold a small diversifier if it aligns with your risk tolerance and investment strategy. A disciplined approach to investing requires us to distinguish between what’s tempting and what truly serves our long-term goals.
Remember, the objective of investing is not just to accumulate shiny objects but to build a portfolio that works hard for you—one that’s designed to grow, generate income, and weather the storms.
When it comes to investing, don’t let the golden illusion cloud your judgment. Seek balance, think long term, and choose assets that help you achieve your unique financial objectives.
James Baker
Albion Strategic Consulting
