What gold is good for investment

Invest in gold

Gold brings little return in the long term

Hendrik Buhrs
Expert for banks and stock exchanges As of August 07, 2020

Hendrik Buhrs

Hendrik Buhrs is an editor in the bank and insurance team. Before joining Finanztip, he reported on economic and consumer issues for the radio programs of the Hessian and later of the West German Broadcasting Corporation. Hendrik studied economics in Münster and Exeter. He gained his first professional experience at Radio Q and on Recklinghausen local radio. He likes to invest the money he has saved in travel.

  • Gold will very likely never become completely worthless: If you are afraid of a currency crash, you can think about buying gold.
  • On the other hand, the gold price has fluctuated more strongly in the past than an investment in globally diversified stocks and in the long term did not even deliver half as much return.
  • The gold price often moves in the opposite direction to stock prices.
  • In the Corona crisis, the gold price has reached a new record.
  • If you want to protect yourself against a financial crisis with gold, then buy gold in coins or bars.
  • We recommend the portals gold.de and gold-preisvergleich.de for purchases.
  • Do not convert more than 10 percent of your assets into gold.
  • Then the value of your gold can slightly weaken the fluctuations in your shares.

The Corona crisiswhich is affecting life and the economy around the world, has caused the price of gold to rise further. In the middle of December, however, the gold price fell again by around 13 percent, compared to its high at the beginning of August, when the marks of 2,000 dollars and 1,700 euros per troy ounce (31.1 grams) had meanwhile been exceeded. How the gold price will develop in the future cannot be predicted with certainty. Finanztip recommends gold as a stabilizing addition at best. Before you buy, you should read our guides.

How useful is it to invest in gold? There is no general answer to this frequently asked question. What matters is what you personally hope for from an investment in gold. It's clear: Because of the return you shouldn't buy gold.

Video: How Good Is It To Buy Gold?

What are the advantages of gold?

As we will show in detail below, gold has in the past gained significantly less in value on average than stocks, for example - and even so fluctuated more. The reason for this is that, above all, demand controls the price of gold. There is no intrinsic value development, unlike with companies and thus with stocks.

But if you are afraid of a currency crash and fear the total loss of your other investments, you can convert a small portion of your assets into physical gold, i.e. buy gold coins or gold bars and store them in your home safe.

Because gold reserves are limited worldwide, the precious metal will most likely keep some Material value. Unlike so-called cryptocurrencies like Bitcoin, gold has been accepted as a means of payment for centuries. Because gold also often moves in the opposite direction to the stock market, it can slightly weaken the fluctuations in the portfolio.

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What is driving the gold price?

As with any commodity, the price of gold comes over supply and demand conditions. What is special about physical gold, however, is that as a natural raw material, its range cannot be expanded at will. If demand picks up, gold producers can only try to get supply through recycling of gold to increase in the short term. If this is not enough, the price rises.

Maximum prices in times of crisis

A look at the past 45 years shows that the price of gold has fluctuated wildly at times. Time and again there were phases of uncertainty that caused investors and central banks to buy gold and thus drive the price up. Maximum prices were achieved between 1979 and 1983 and from 2010. Since April 2020 and over the following summer months, the gold price has reached new record levels in euros due to the Corona crisis.

In the 1970s investors feared high inflation in many developed countries. The price of gold rose in January 1980 to $ 850 per troy ounce (31.1 grams). Only when Paul Volcker became the new head of the US Federal Reserve, regulated the precious metal exchanges more closely and promised to limit the supply of money, did this fear evaporate.

From 2008 the fear of a collapse of the financial system and, subsequently, of a debt crisis in European countries and banks dealt with. The price of gold rose to more than $ 1,800 a troy ounce. The uncertainty only subsided when the head of the European Central Bank (ECB), Mario Draghi, promised in summer 2012 that he would do whatever was necessary to save the euro.

The gold price experienced another low for the year in October 2018. A troy ounce was still worth 1,180 US dollars (around 1,052 euros). In the summer of 2019, the gold price rose again. With more than $ 1,500 he reached in August the highest level in six years.

Above all, she played World politics a role: the conflict between the United States and Iran, the trade dispute between China and the United States and a possible unregulated exit by Great Britain from the European Union. The euro is also under pressure. All of this has increased the demand for gold.

The economic upheavals caused by the Corona pandemic have after all been driving gold demand since spring 2020. At the beginning of August, the world market price for one troy ounce exceeded the mark $ 2,000 (around 1,720 euros).

gold.de
Comparison portal for gold coins and bars
  • One click to the dealer's info page
  • Shipping costs included in the total price
  • The time of the last price query can be viewed
gold-preisvergleich.de
Comparison portal for gold coins and bars
  • With one click to the dealer information
  • Shipping costs included in the total price
  • The time of the last price query can be viewed
Can only be locked with the provider

Why is gold not suitable as an individual investment?

In times of crisis, short-term price increases are possible for gold. But that doesn't mean that gold delivers higher returns than stocks in the long term. Gold delivers neither interest nor dividends. The return is therefore based solely on the price development.

The following table shows that gold can, but does not have to, outperform stocks over the medium term. In the long term, a pure gold investment has given investors less returns and more fluctuations than an investment in the MSCI World share index.

Returns and fluctuations in the world stock index versus gold

 MSCI World1 gold2 
PeriodReturnfluctuation3Returnfluctuation
1980 – 199018,8 %15,4 %-1,2 %21,8 %
1990 – 200012,6 %16 %-2,6 %12,3 %
2000 – 20182,7 %14,9 %7,4 %12,5 %
1975 – 20188,6 %15,1 %3,8 %15,8 %

1 We have calculated the performance on the MSCI World net index, which offsets the dividends after deducting taxes and costs, and converted the index values ​​into euros.
2 We converted the gold price into euros.
3 We refer to fluctuation as the average standard deviation of the monthly returns (annualized).
Source: Finanztip calculation (as of February 1, 2019)

For example, if you invested in gold in 2000 and stayed with it until the end of 2018, you have achieved a higher annual return with less fluctuation than a pure equity investment. On the other hand, those who invested earlier, around the beginning of the 1980s or the beginning of the 1990s, and stayed with them for ten years, did a far better deal with stocks. In the medium term, a gold investment is therefore most likely a bet with an uncertain outcome.

Over the long term (1975 to 2018) a pure equity investment brought more than twice as much return per year as gold with slightly less fluctuation. The graphic below illustrates this:

More on this in the article Buy gold

  • Those who want to arm themselves against crises can buy gold coins or bars. Preferably online.
  • Our provider recommendation: gold.de, gold-preisvergleich.de

To the advisor

Why is gold only suitable for risk diversification to a limited extent?

We have already shown that gold is not worthwhile as an individual investment. Another question is whether you should add a percentage of gold to your portfolio. Experts argue about how much that could be. The range of recommendations ranges from 5 to 25 percent of the assets. We hold a stake of up to 10 percent makes sense, since a higher admixture could impair the return opportunities for the entire portfolio too much.

From the perspective of an investor looking to diversify risk, this addition might be worth considering at first glance. After all, gold and stocks are barely linked in terms of performance. In other words: the value of gold often changes opposite to stocks. The table shows that the gold price collapsed less sharply in crises earlier than that of the world share index. In recent crises, it has even risen while stocks have fallen.

Stock and gold returns in financial crises

Financial crisisPeriodReturn stock index
MSCI World
Return gold
Black MondayAugust 1987 to January 1988-24,5 %-7,9 %
Real estate crisis in JapanSeptember 1989 to August 1990-36,9 %-13,4 %
Financial crisis in RussiaApril 1998 to September 1998-16,5 %-12,2 %
Burst of the new economy bubbleAugust 2000 to March 2003-53 %4,1 %
US real estate crisis and global financial crisisOctober 2007 to March 2009-46,1 %33,8 %
Euro crisisFebruary 2011 to November 2011-17,8 %28,7 %

Source: MSCI, Bundesbank, Finanztip calculation (as of June 9, 2016)

We therefore examined the effect of adding a small amount of gold to the portfolio. Result: A small addition of gold makes the portfolio more volatile in the long term. But the effect is not very strong.

As this table shows, 10 percent gold in the portfolio would have reduced fluctuations by 0.5 percentage points annually over the long term. In return, the annual return would have been 0.2 percentage points lower.

Returns and fluctuations in equity portfolio with gold component (1975 - 2018)

 average
Return per year
Fluctuations
per year1
just gold3,8 %15,8 %
only stocks8,6 %15,1 %
90% stocks, 10% gold8,4 %14,6 %

1 average standard deviation of monthly returns (annualized)
Source: Bundesbank, Finanztip calculation (as of February 1, 2019)

Regular shifting is an option for very few people

In addition, there is basically the possibility that investors regularly rearrange their portfolio, i.e. always bring the gold component to 10 percent of the equity component. Because of the transaction costs, this is only worthwhile for very few. You can find more information on this in the detailed article Rebalancing.

It is best to buy physical gold in the form of gold bars or coins from the providers listed below. We have explained what to look out for in the Buying Gold Guide.

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Hendrik Buhrs

Hendrik Buhrs

Hendrik Buhrs is an editor in the bank and insurance team. Before joining Finanztip, he reported on economic and consumer issues for the radio programs of the Hessian and later of the West German Broadcasting Corporation. Hendrik studied economics in Münster and Exeter. He gained his first professional experience at Radio Q and on Recklinghausen local radio. He likes to invest the money he has saved in travel.

Sara Zinnecker

Sara Zinnecker

Sara Zinnecker was editor for investment topics until June 2020. Sara had previously written about investments and retirement provision for the Handelsblatt. She completed her traineeship at the Georg von Holtzbrinck School for Business Journalists.

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