Gold prices soar to record highs as worried investors want security

The price of gold reached $1944.92 an ounce on Monday

Stephen Little
Tue, 07/28/2020 – 11:53

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Gold prices have hit a record high for the second time this year as nervous investors look for the safest haven for their money.

Investors are buying more gold due to its safe reputation, as they worry about the economic consequences of the coronavirus pandemic on their other investments.

The price of gold is now up 28% over the course of 2020.

In addition to fears around coronavirus, ongoing trade tensions between the US and China are also steering nervous investors towards gold.Earlier this week China shut the US consulate in Chengdu, after the US closed its consulate in Houston.

Government stimulus plans and reduced interest rates have also hammered returns on other ‘safe havens’ for investors, such as bonds.

The gold price had spiked earlier in the year in January, reaching a seven year high, after Iranian military leader Qasam Soleimani was killed in a drone strike by the US in Baghdad.

Why gold is seen as a safe haven

Gold retains its value in times of financial uncertainty, which is an appeal for some investors.

As gold is scarce and more can’t be produced at will it tends to maintain its value over time.

Investors see gold as a hedge against market volatility and economic slowdown in times of geopolitical uncertainty.

How to invest in gold

Although gold is popular in this economic climate, for most investors it should only make up at most a small fraction of a well-diversified portfolio. There are other safe haven investments available, gold does not produce an income, and the price is roughly at a seven-year high. 

When investing in gold, you can buy coins and bullion bars, either to hold yourself or to be held by a dealer. You can also invest in shares of gold mining companies or specialist funds and investment trusts.

It is also possible to invest in shares of gold mining companies or specialist funds and investment trusts.

One of the easiest and cheapest ways to invest in gold is through an exchange traded commodity (ETC). ETCs are listed and traded on a stock exchange that tracks the price of gold. They are available to UK investors with SIPP and ISA accounts and can be traded on investment platforms.

Gold backed ETCs are held in a vault, while synthetic gold ETCs are designed to track the price of gold by buying gold-related derivatives.

Moira O’Neill, head of personal finance, interactive investor, says: “Whilst gold is a good diversifier, holding 5% or so feels appropriate for a long-term investment. It’s often viewed as a haven and has the potential to perform as one when held for the long term. But gold can have big short-term swings in value and is sensitive to anything from the US dollar, Sterling fluctuations, through to the Indian wedding season.”

Sarah Coles, personal finance analyst at Hargreaves Lansdown, adds: “Gold has gained a reputation as a safe haven in difficult times for the world economy, which is why the price got a bit of a bump when news emerged of growing tensions in Iran.

“But despite being a so-called safe haven, it comes with risks. The price isn’t dictated by real-world uses of gold, but is driven by fluctuating demand from investors, so it can be very volatile. Gold also suffers from the fact it attracts no interest and delivers no dividends.

“It is therefore a risky strategy to make gold a significant part of your portfolio, but some investors like to keep a small proportion of their diversified portfolio in is, as a hedge against uncertainty in the world economy.”

She says that if you buy physical gold you could easily lose 5% of the value as dealers make their money on selling gold for a premium and buying it back at a discount.

Coles adds: “The easiest and cheapest way to invest in gold is through an ETC, which will track the price of gold.

“If you opt for a synthetic gold ETC you must bear in mind that you are taking on the additional risk associated with the third-party selling the derivatives.”

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