It’s fair to say that commodities are all too often overlooked by investors as a potential asset class, with the majority of wealth managers primarily recommending allocations of stocks, bonds, or mutual funds.
However, the global commodity service market is expected to reach $85.78 billion alone by 2028, showcasing an annualised growth rate of 4.2% over the next six years.
Given this, and the pressing need to diversify your portfolio to reduce risk in a constrained economic climate, you may want to consider investing in commodities such as gold. But why is this a viable option and what are the associated advantages and potential risks?
Why Invest in Gold?
In truth, gold is one of the oldest tradeable commodities in the world, with coins having been used as a tool for bartering and exchange since 500 BC.
Historically, of course, gold was a physical asset that took the form of coins and bars, while it remains one of the most secure stores of wealth for investors to this day. However, it’s now also possible to trade the price of gold through spread betting and contracts for difference (CFDs), without assuming ownership of the underlying asset.
This has afforded investors additional flexibility and options in the marketplace, while gold has retained its so-called “haven” status among investors.
This means that the asset typically sees demand and its value rise during times of economic contraction or recession, as investors look to preserve their wealth and diversify successfully as the landscape changes.
What are the Advantages of Investing in Gold?
Gold’s haven status and the asset’s ability to successfully diversify your portfolio during a recession represent excellent reasons to invest, but they aren’t the only advantages offered by this commodity.
For example, gold is a highly liquid asset, which means that it can be sold or converted to cash with relative ease.
Even if you buy physical stores of gold in the form of coins or bullion (bars), you can benefit from increased liquidity and almost constant demand, particularly in instances where you have premium assets with a high purity level.
Gold also lacks the volatility of commodities such as oil, as it regularly trades within a relatively narrow price range and rebounds rapidly from economic shocks. To this end, the price of gold rose incrementally during the 2008 financial crash, while it also saw increases throughout the coronavirus pandemic of 2020 and the first half of the following year.
These factors typically make gold a highly appealing asset, especially as the economic climate worsens and a global recession inches ever closer.
What are the Risks of Investing in Gold?
While gold is not as volatile as some commodities, it’s not a risk-free investment. It remains vulnerable to universal factors such as supply and demand and geopolitical conflicts, so the asset’s price can still fluctuate noticeably over time.
However, it’s also a well-known fact that gold tends to have an inverse relationship with inflation, the latter of which is only typically present during times of growth. However, the current economic contraction is being driven by rampant inflation, which measured 10.7% in the UK at the end of 2022.
It’s this factor that explains the decline in gold prices through 2022, while it may create an unusual scenario where the asset continues to depreciate as the wider economic climate worsens.
This is something for investors to watch in 2023, as while gold always offers value and a secure store of wealth, it may not be the ideal asset for as long as inflation remains high.