Gold is supposed to be a safe haven. The oldest store of value in the world, used to protect wealth for more than 4,000 years. The asset that is supposed to help investors sleep at night. So how come it plunged about 20 per cent? That is not preserving wealth. That is destroying it.
The truth is that gold is a strange kind of safe haven. And at times, it can be a very dangerous one indeed.
Gold has had a stunning run lately. Last year, the price surged 65 per cent to end the year at about $4,310 an ounce, according to BullionVault. Silver did almost as well, climbing more than 40 per cent to about $40.
We have to go all the way back to 1979 to find a bigger annual jump in the gold price. Fears over the Iranian revolution and the Soviet invasion of Afghanistan saw gold rocket more than 133 per cent to a then-record $850.
The price quickly collapsed back to about $200, and did not recapture that earlier peak for almost three decades. Gold does not always shine.
The millennium, by contrast, has been brilliant for the yellow metal. Investors have rushed to add it to portfolios during periods of turmoil, hoping to offset potential losses elsewhere. There has been plenty to worry about, with the dot-com crash, 9/11 terror attacks, financial crisis, the 2011 eurozone crisis and the Covid-19 pandemic.
Quantitative easing, widely seen as debasing fiat currencies, gave gold a further boost, as did US tension over China, Iran and Greenland, concerns about ballooning sovereign debt, and fears over the health of the US dollar. Central banks have also been furiously topping up their gold reserves, adding fuel to the fire.
If gold had a stellar 2025, this year initially looked even brighter. Prices climbed to another all-time high of about $5,608 an ounce. Last Friday came the sell-off. On Monday, gold opened at about $4,590. That is a drop of $1,018, or just more than 18 per cent.
Technically, not quite a crash. That takes us back to where gold stood at the start of January, but is still pretty painful for anyone who bought at the top. So what happened?
The last stage of the rally was driven by fears that US President Donald Trump would replace Federal Reserve chairman Jerome Powell with someone more pliable, who would cave into pressure to slash interest rates, further weakening the dollar and stoking inflation.
Mr Trump surprised markets by nominating central bank veteran Kevin Warsh, which Stuart Clark, portfolio manager at Quilter, says brought an audible sigh of relief from investors. “This is a lot more moderate pick than it could have been.”
Gold plunged as panic eased, and some private investors may now be wondering if they should buy the dip. The price rebounded on Tuesday morning to just over $4,900, but Chris Beauchamp, chief market analyst at trading platform IG, urged caution warning: “The speed of the decline has not been witnessed for decades, and the sell-off is unlikely to halt soon, even if the pace slows.”
Some investors might not want to buy it at all, says Russ Mould, investment director at AJ Bell. “Gold itself has limited industrial uses and ownership comes with costs such as storage, insurance and the absence of any yield, which investors can get from rival safe havens such as cash, money market funds or bonds.”
Tony Hallside, chief executive of STP Partners, says investors must understand what they are purchasing. “Gold is both the safest and the riskiest asset in the world. Safe because it protects against systemic stress, policy mistakes and geopolitical shocks, risky because at recent levels, it’s no longer just a defensive investment, but crowded and momentum-driven.”
How to buy gold?
Traditional financial advice treats gold as a long-term buy-and-hold asset, with investors typically advised to allocate no more than 5 per cent to 10 per cent of their portfolio to it. But how should private investors buy it?
There are three main routes: physical gold in the form of coins, bars or jewellery; exchange-traded funds (ETFs) that track the gold price; and shares in the companies that mine it.
head of multi-asset and absolute return strategies at Mashreq Capital
Mr Hallside says each comes with distinct risks. “Physical gold removes counterparty risk but lacks liquidity, ETFs offer speed and access but sit inside the financial system you are hedging, and miners are leveraged bets on gold prices, bringing added operational and political risk.”
Andreas Anthis, head of multi-asset and absolute return strategies at Mashreq Capital, says ETFs are the cleanest and most cost-efficient option. “Physical gold is only suitable for investors who specifically require tangible exposure. Another possibility, buying gold options, is best reserved for tactical or hedged strategies, given current pricing.”
Mining stocks can deliver spectacular returns. Shares in FTSE 100-listed Fresnillo soared 400 per cent last year, making it the best performer on London’s blue-chip index, rising six times faster than the gold price itself. Unlike bullion, Fresnillo pays a dividend, albeit with a modest trailing yield of 0.72 per cent.
But Mr Anthis warns that mining shares introduce a host of additional issues unrelated to the commodity, including “individual company risks, broader macroeconomic and microeconomic conditions, and overall stock market volatility”.
“As a result, performance can diverge significantly from the movement of the commodity itself.”
Jason Hollands, managing director of Evelyn Partners, says investors might be swayed by the tax treatment, depending on where they live. “For example, in the UK, gold coins produced by the Royal Mint are treated as legal tender currency, and exempt from capital gains tax.”
For most investors, Mr Hollands agrees that the simplest route is through an ETF backed by physical gold. “Here you own exposure to a traded note which is fully backed by physical bullion held in a secure vault. Our preferred pick is the Invesco Physical Gold ETC, one of the largest and with low annual costs of just 0.12 per cent.”
Other popular ETFs include the iShares Physical Gold ETF and WisdomTree Physical Gold ETF. Investors keen on exposure to mining stocks can either buy individual shares, or spread risk with a passive ETF tracking a spread of stocks, such as the VanEck Gold Miners ETF, VanEck Junior Gold Miners ETF and the iShares MSCI Global Gold Miners ETF.
Among actively managed funds, the BlackRock Gold and General Fund is long established, and contains names such as Barrick Mining, Newmont, Kinross Gold, Endeavour Mining and Alamos Gold.
Other active choices include the Invesco Gold & Special Minerals Fund and BlackRock World Mining Trust. The latter offers diversified exposure across the global mining sector with a significant allocation to gold.
Whether you invest direct or through a fund, Mr Hollands warns gold and silver mining stocks are notoriously volatile.
“Changes in bullion prices can be magnified through big swings in company profitability, given the costs and risks of extraction.
“In our experience, most investors buy gold for defensive reasons and to diversify beyond equities, rather than to own a volatile, specialist equity fund.”
Right now, buying gold in any form is not for the faint-hearted. It says a lot about the world investors operate in today, where even the ultimate safe haven can be wildly volatile.
