Crisis-proof investment. Invest in gold and protect against market risks.

Investors have an effective tool against the risk of economic crises and high inflation: Buying gold. Fact is, the precious metal is a safe investment in turbulent times as well. Find out how investors can invest their money in gold.

Gold has always been seen as a safe investment

Gold has long held a great fascination for people. For millennia, this rare, shiny metal has been synonymous with wealth, power, and stability. Over the centuries, countries have used it to protect their economy by pegging the gold price to their respective currency. Globally, this approach only came to an end with the collapse of the Bretton Woods economic order in the early 1970s.

As a result, the gold price was freed from its peg of USD 35 per ounce. Since then, it has traded freely on the world market – at one time reaching a value of around USD 2,000 per ounce. So, although gold has lost some of its relevance in monetary policy terms, it hasn't become completely insignificant either. While the Swiss National Bank, for example, has sold over 1,000 tons of its gold since 2000, emerging-market countries in particular have built up their holdings in recent years. Probably also as a result of uncertainty – triggered by the COVID-19 pandemic at the start of 2020 – demand for gold among investors experienced a renaissance. By contrast, the industrial use of the precious metal seems almost diminishingly small.

Central banks increasingly deciding to invest in gold 

Source: World Gold Council; GFMS; London Bullion Market Association

Invest in gold to protect against inflation and crises

Gold offers brilliant opportunities for private investors, too. Fact is, it's a relatively safe investment that holds its value extremely well despite its price volatility – particularly in the short term. In addition, the price of gold often goes in the opposite direction to prices on the stock market and interest rates, making gold investments a good insurance policy against economic downturns and full-blown crises.

This particular quality of the precious metal was very much in evidence during the financial crisis of 2008 and 2009: While share prices slumped across the globe, the value of gold increased sharply. In addition, gold's rarity and limited supply offers valuable protection against high inflation rates. As a tangible asset, the precious metal – in the form of gold coins, gold bars, or jewelry – gives investors protection against inflation.

Gold was a safe investment during the financial crisis 

Source: Credit Suisse/Bloomberg

Buying physical gold – gold bars and coins

The traditional way to invest in gold is by buying it directly in the form of coins and bars. Purchasing and holding physical gold provides security, as there is no counterparty and therefore no default risk either. However, gold bars and coins also need to be stored and protected against theft – whether in a safe or safe deposit box. This will lead to additional costs.

Gold bars weighing between one ounce and one kilogram are the best option for private investors – they are the most widely traded, and offer the best spread between buy and sell prices. In terms of coins, there is a wide selection available. Any investment coins are suitable, and include the likes of the Vreneli, the Vienna Philharmonic, and the Krugerrand. The gold content of the coins is an important factor. The higher it is the better, because minting costs are lower in relation to the material value. In addition, gold coins can also be collectible – depending on the coin and its vintage. This can also influence their price, regardless of the gold content.

Gold ETFs – the straightforward way to buy and sell gold

It's also possible to invest in gold through exchange-traded funds (ETFs) and index funds. These passive investment vehicles buy physical gold, and in that way precisely replicate the price of the precious metal. This gives investors an uncomplicated way to invest in gold, and to bet on a rise in the price.

Lower costs and minimal effort for private investors are the advantages of this type of investment. In addition, the liquidity that exists within the funds ensures flexibility when it comes to the trading of units. Investors are therefore able to react at very short notice, so as to benefit from a rise in the gold price. With ETFs or index funds, investors are also entitled to delivery of the gold and the money invested is deemed a special fund under the Collective Investment Schemes Act; this ensures the security of the assets even if the bank fails. A fixed fee is payable for administering the fund within your safekeeping account. 

Investing in gold: The advantages and disadvantages.

  • Stable and retains its value
  • Gold price often increases in times of economic crisis
  • Physical holding of gold bars and coins provides security
  • A hedge against inflation risks 
  • Long-term performance tends to be on the poor side
  • No regular income such as interest or dividends
  • High volatility
  • Currency risk, as traded in US dollars 

A precious metal account is a flexible way of investing in gold 

Another alternative is the precious metal account. With this option, the gold isn't owned by the investor; instead, the investor merely acquires a claim against the bank for the delivery of an amount of gold corresponding to the money they have invested. This also has its advantages: For instance, no value added tax is payable on the purchase and there are no worries about storage. In addition, the balance in the account is very easy to adjust. On the flipside, precious metal accounts are only insured up to CHF 100,000 under the deposit protection scheme and account fees are levied.

Buying gold and diversifying your portfolio

Gold is still very much in demand and attracts a lot of investors. But it can also be a risky investment. Investors must be prepared to accept greater risk, especially in the short term, and to forgo superior long-term performance. In addition, investing in gold carries a significant opportunity cost because it does not generate any income in the form of dividends or interest. Nevertheless, the precious metal can often be a sensible investment. Judging by the trend in the price of gold, particularly in the new millennium, gold can still deliver a respectable return over the long term.

What's more, bars and coins will retain their value even in economically turbulent periods. Particularly when interest rates are low, buying gold offers an excellent hedge against economic crises. The substantial potential protection that the precious metal provides against rising inflation rates would also seem to be beyond doubt. On account of these characteristics, gold merits a sizeable place in any well-diversified investor's portfolio – especially in times of crisis.

Investing in gold pays off in the long term

Source: Credit Suisse/Bloomberg 

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