Gold prices have been rising. Is it always a good investment?

Canada’s iconic gold rush occurred in 1896, when miners discovered gold in the Klondike. Once whispers were heard of a discovery in the far north, tens of thousands of would-be miners from around the world made their way to the Yukon, hoping to make their fortunes. Unfortunately, many died before reaching the goldfields.

Gold fever isn’t as perilous as it once was, but it’s back: Between January 1 and August 16, 2024, gold prices climbed 21% to an all-time high of US$2,500 per ounce — nearly double the gain of the S&P 500 over the same period. Investors large and small are still attracted to gold, with billions of dollars in value changing hands every day. Whether it’s an appropriate investment for you may depend on your investment plan and risk tolerance. But if you’re wondering what’s driving interest in this precious metal, read on.

What’s gold really used for?

Unlike other commodities that power our economy (like oil), most gold remains static. In fact, the bulk of it remains locked away in government-owned high security vaults and personal lock boxes. That’s because much of the supply is owned by investors (24%) and central banks (23%). A smaller portion (7%) of mined gold is used in industry (for things like electric vehicles and smart phones) and the remainder — almost 47% —  is made into jewelry. ¹

What motivates people to invest in gold?

Many people choose to invest in gold because the value has historically outpaced inflation. Unlike cash, gold tends to hold its value over time. But its good to remember gold bullion on its own doesn’t generate any additional income although some gold mining companies issue dividends.

"Gold has climbed by 143% over the last decade, while silver has climbed by 90% and platinum has underperformed at -15%."

Central banks hold gold to help stabilize their economies in times of crisis. Because it’s also liquid (read: easily tradable), central banks buy and sell gold depending on the economic need although since 2010, they have been bigger buyers of gold than sellers.

In countries like India and China, many people consider gold more trustworthy than paper or electronic money. Even in countries where people have faith in the economic system, you’ll find investors who keep a significant chunk of their savings in gold. Its enduring intrinsic value is one reason it continues to hold a privileged place in many areas of the world.

What does market volatility have to do with gold?

Gold tends to do well in times of uncertainty because of how easy it can be to buy and sell it. You can trade gold almost anywhere in the world at any time. Moreover, unlike cash, governments and central banks can’t just print more gold. Its value rests on the fact that the supply stays relatively constant over time.

Gold also attracts investors in times of uncertainty because it exists outside of government control. Its price can’t be manipulated. Historically, gold also tends to trade inversely to the value of the U.S. dollar, the currency of choice for most international government transactions. When the greenback is strong, gold languishes and vice versa.

What influences gold’s price?

Unlike other commodities, where price is often closely correlated with fluctuations in supply and demand, investor sentiment has a big — but hard to measure — impact on the price of gold. If people think the world is in trouble, for example, either as a result of geopolitical issues or general economic uncertainty, gold tends to do well. Since it is also a hedge against inflation and the value of the U.S. dollar, people may invest more heavily in gold when they believe those two large indicators show a change in the economy. Currently, as some central banks choose to lower their key policy rates, many investors are investing in gold because they believe it can hold its value even as bond yields decline.

Here’s the problem: It’s very difficult to predict when investor sentiment will turn. If investors suddenly feel more optimistic about the state of the economy, the price of gold could drop quickly.

Central bank demand can influence price, but so too can upwardly mobile consumers in India and China, where gold jewelry plays an important role in society.

Hussein Allidina, Managing Director and Head of Commodities at TD Asset Management, attributes the sharp rise of gold in 2024 to net purchases made by central banks, especially in the developing world. ² Between 2000 and 2024, China’s gold reserves averaged 1,195 tonnes. Since the start of this year, however, the country’s reserves have grown to about 2,260 tonnes. As well, following Russia’s invasion of Ukraine, the U.S. confiscated Russian reserves of U.S. dollars, which forced Moscow to buy gold instead.

How can I invest in gold?

There are three basic ways to buy gold.

Own it physically.

Buy gold jewelry, coins or bullion in the form of minted bars or ingots.

Pros: Gold, even in the form of jewelry, can serve as a hedge against inflation. Added bonus: It looks nice to wear or display.

Cons: There’s a risk of loss through theft, misplacement or fire. Of course, you can insure your holdings or pay to have the gold stored in a safety deposit box or vault, but these expenses will detract from your returns. Individual investors may also find it challenging to sell their gold as some resellers offer below-market prices. Buyers of coins and bullion are also faced with decisions about what weight, purity and types of coins to buy, such as Canada’s Maple Leaf or America’s Gold Eagle.

Own securities invested in gold bullion.

If you have a brokerage account, you can buy gold futures or exchange-traded funds (ETFs) that own gold stored in vaults.

Pros: You’ll get direct exposure to the commodity price with no storage fees (although you should keep in mind brokerage commissions).

Cons: You can’t touch it. ETFs also often come with management fees and, if you choose that route, you’ll have to decide which ETF is right for you. If you buy a futures contract, you will need to decide what to do if you have made a profit or not before the contract expires. Your options may include continuing to buy gold future contracts or take ownership of the underlying gold.

Own gold mining stocks.

You can invest in individual gold exploration companies or miners. Mining companies have established operations while explorers, as the name says, seek out new gold discoveries. Another option is to invest in gold royalty stocks. These companies purchase contracts allowing them to buy a portion of a gold miner’s production, typically at a fixed price.

Pros: Mining companies that sell shares in their operations are designed to grow shareholder value over time and, in some cases, generate dividend income.

Cons: You’ll need to be proficient at stock analysis to judge which stocks are worth purchasing and are right for you. Mining company stocks may only partly reflect the underlying price of gold and can come with a variety of risks — just like any investment. For example, most gold mining companies also extract other minerals such as silver or coal which can have an impact on the stock price. As well, if a mining company or a royalty has agreed to a fixed price for their production, they may not benefit from any increase in gold’s value.

Ultimately, if you choose to invest in gold, the method you pick will depend on your time horizon, risk tolerance, personal preference and the role that you want gold to play in your portfolio.

How has gold performed as an investment historically?

Comparing gold’s performance to that of other assets depends a great deal on what time frame you’re examining. Since 1994, the weekly spot price of gold has risen more than 500%, which is below the total returns of the S&P 500 Index at 1,091%. ³

However, gold tends to lose favour in high-interest environments as investors opt for higher-yielding assets. Furthermore, when gold reaches a new high, that price has often been short-lived, such as in 1980, 2011 and 2020. It remains to be seen whether gold’s 2024 highs can be sustained.

In comparison to other commodities, gold has done relatively well, but again it depends on time frame. According to TD Bank, gold has climbed by 143% over the last decade while silver climbed 90% and platinum has underperformed at -15%. Silver, at about US$28 at the time of publishing, trades at a lower per ounce price than gold, leading many price-conscious people to prefer it over the yellow metal.

How much gold should I hold?

How much gold you hold in your investment portfolio (or your jewelry box) will depend on your personal financial circumstances. While gold possesses historic and cultural affinities about wealth, people should be aware that historically it hasn’t outperformed the broad range of stocks over time. In fact, its most significant role may be as a hedge against inflation and the U.S. dollar. How much you should invest, what kind of gold investment is right and how long you should hold on to your gold is a personal preference tied to your own financial goals.

The takeaway

People have been attracted to gold for centuries, and they’re unlikely to stop anytime soon. Whether you’re already passionate about gold or merely curious about the possibility of investing, it’s important to understand what makes this particular investment a little different from others. From there, you can make an informed decision about whether it’s worth your time and money.