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Throughout history, gold has served an important role as currency, a symbol of wealth, a store of value, and even as a key material in the technology sector.
In 2024, gold prices increased more than 26% to over US$2,600 an ounce (Oz), matching the performance of the S&P 500 Index and surpassed the inflation rate for the year. Central banks around the globe also bolstered their reserves with gold in the same year, underscoring the yellow metal’s enduring relevance and value.
Source: World Gold Council
With gold forecasted to grow 5% annually through 2040, this suggests a bright outlook for gold investors, especially against the backdrop of ongoing global economic challenges, geopolitical tensions and inflationary pressures.
Here are some reasons why you should consider investing.
#1 Portfolio Diversification
Diversification is one of the most basic risk management strategies, and gold can play a critical role helping investors diversify from a conventional portfolio of stocks and bonds. One of the most famous diversification strategies that includes gold is the Permanent Portfolio Theory.
Introduced by Harry Browne in the 1980s, the Permanent Portfolio Theory advocates for an equal allocation to:
– Stocks (25%)
– Bonds (25%)
– Cash or Cash Equivalents (25%) – mainly for liquidity and protection against a recession
– Gold (25%)
Under uncertain economic conditions, such as inflationary or even deflationary periods, gold may perform well while stocks and bonds falter.
However, we are not suggesting that everyone should now rush to gain a 25% portfolio exposure to gold. Rather, we are making a more simplistic point – a lot of research and studies have shown the advantages that diversification to gold brings to your portfolio. Similarly, there exists other industry conventions that highlight how just 5% of gold can positively impact your overall investment portfolio.
#2 Reduce Portfolio Volatility
In general, investing in gold ensures that your portfolio remains resilient across different economic cycles. During periods of economic and geopolitical uncertainty, investors will flee riskier assets and turn to safe haven assets – usually driving up demand for gold and, hence, its price.
In the chart below, you can see that gold has had a low or negative correlation to other traditional financial assets like stocks and bonds, as well as private equity and even real estate.
This means that when stocks and bonds are underperforming, gold often retains or increases in value while other assets decline – reducing your overall portfolio volatility. This has shone through in the eight market corrections that the S&P 500 Index has experienced since 1970 – right before major currencies, including the US, abandoned the gold standard.
In the table above, you can also see that the S&P 500 Index fell by over 45% on three occasions in Dec 1972 to Sep 1974, Aug to Nov 1987 and Oct 2007 to Feb 2009. During these market crashes, gold posted a strong return instead – 137%, 16% and 20% respectively.
Furthermore, only on two occasions when the S&P 500 Index experienced a drawdown, did gold also post a negative return. This happened in Nov 1980 to Jul 1982 and Dec 2021 to Sep 2022.
On average, the S&P 500 has fallen from 33% to 35% during a market crash, while gold increase 17% to 19% during the same period. Having exposure to gold can act as a counterbalance to your equities portfolio during market crashes.
#3 Potential Hedge Against Inflation
Today, inflation continues to be a worry as cost-of-living pressures persist alongside higher interest rates. Historically, gold has acted as a hedge against inflation, appreciating as the value of paper currency declines.
Looking at the past 50 years, the Singapore Department of Statistics shows that the CPI-all item in Singapore rose over 1.8x between 1974 and 2024. In the same timeframe, the price of gold rose over 6.5-folds.
Similarly, in the US the price of gold has risen 8.1% on average since 1971. While this is higher than the 3.9% average increase in US consumer price index (CPI), it is closer to the M2 Money Supply in the US – which is a broad measure for money supply in the US – reinforcing its role as a store of value.
Source: World Gold Council
#4 Gold Has Stood The Test Of Time
Even though gold does not provide a yield, it generates potential returns through capital appreciation. It has also retained its value over a long time – unlike paper currency. This is mainly because gold prices are not tied to any single economy or government.
Consistent demand for gold has created strong liquidity for the yellow metal, ensuring it has remained a trusted investment choice for preserving wealth over centuries. By including gold in a portfolio, investors can potentially enhance the stability of their portfolio, reduce overall risk, hedging against inflation and protecting against economic drawdowns.
There is also an intrinsic value attached to gold due to the difficulty of extracting it from the ground, its utility in electronics sector and as jewellery.
Paper Gold vs Physical Gold: How Should Investors Gain Exposure To Gold?
For investors who wish to gain exposure to gold as an asset class, there are two main ways: buying physical gold or buying paper gold (i.e. through an ETF, unit trust or the OCBC Precious Metals Account).
The traditional method has been to buy and hold physical gold. While many people claim jewellery is a form of physical gold investment, the typical investment is into gold bars or coins.
However, there are multiple challenges in buying physical gold, including transportation, storage and security concerns. Since gold is relatively expensive at over US$2,900/Oz (as of 20 Feb 2025), buying and selling smaller quantities of gold may mean having to pay a higher price. Buying physical gold may also include more opaque dealer commissions.
Paper gold is the other common way to gain exposure to the yellow metal. You can do this either through exchange traded funds (ETFs) listed on stock exchanges, unit trusts or through the OCBC Precious Metal Account.
Besides eliminating transportation, storage and security concerns when you invest in a gold ETF or unit trust, you also enjoy superior liquidity as well as more transparent pricing. Gold ETFs and unit trust can be traded the same way you trade equities and/or bonds through a brokerage or investment firm.
However, there are costs to doing so too. You will have to pay attention to the brokerage commission you are paying to buy and sell, as well as the recurring fund management when holding the investment. Often for ETFs, you also have to buy at least 1 lot, which can still cost a few hundred dollars.
In contrast, OCBC’s Precious Metal Account allows you to start investing from as little as 0.01 Oz or 0.31 grams of gold, which costs less than S$40 (as of 31 January 2025). You need not worry about additional costs as no storage and custody fees will be incurred.
Moreover, you don’t just get access to gold either, but also to silver. While silver is a lower cost alternative to gold, it also acts as a safe haven investment and a good inflation hedge.
Source: OCBC Precious Metal Account
Be Aware Of The Limitations To Gold Exposure
While there are compelling reasons to gain exposure to gold, you need to go in with your eyes open, just like any other investment.
One of the biggest drawbacks to investing in gold is that it does not generate any income as compared to stocks that may be able to pay regular dividends, or bonds that have an obligation to make interest payments.
In a strong economy, businesses can ride on the growth wave while gold is not able to as it is not supported by an underlying business.
Moreover, some of the advantages of gold, such as being a hedge against inflation and volatility, may only be true over longer holding periods and may not be consistent across shorter terms. Factors like rate cut speculations and geopolitical uncertainties can also impact gold’s price in the short-term.
In summary, gold is best viewed as a tool for diversification, risk management and long-term hedge, rather than the primary driver of your portfolio. You may also want to consider your personal risk appetite before deciding on the appropriate level of exposure that gold should take in your portfolio. Ready to invest? Get started with an OCBC Precious Metals Account in just a few taps on the OCBC app.
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