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Most of us are aware of the importance of not putting all our eggs in one basket when investing, and gold can play a vital role in ensuring your portfolio is well-diversified.
The reason diversification matters for investors is that it means you’re not relying on the performance of one particular asset to provide you with returns. Instead, the aim is to spread your money across a wide range of different asset classes and geographical areas, helping to reduce risk.
Making sure your money is invested across several asset types and sectors can minimise the impact of any stock market shocks, as if one investment performs badly, the hope is that some of the others might perform well, helping to offset any losses.
Here, we explore some of the reasons why gold can play such an important role in ensuring your investments are diversified, and how to buy gold either physically or digitally via The Royal Mint if you’re thinking about investing in it for the first time.
Please remember that investing in gold is not without risk and before making any investment decisions, you may want to seek advice from a professional independent financial advisor.
1. Gold has weak correlation to stocks, bonds and other commodities
One of the main reasons that gold can be a useful diversifier for investors is its low correlation with other asset classes, or, in other words, how it often moves in a different direction to the way they do.
For example, during periods when the economy is thriving, stocks and shares tend to perform well, whilst gold prices may stagnate. Conversely, during periods of economic and political uncertainty, gold tends to perform well as investors flock towards what they perceive to be ‘safe-haven’ assets. Gold’s value is intrinsically linked to its scarcity, so when there is a sharp swing in demand, this will result in an upward swing in the price.
Holding gold can therefore help reduce overall volatility, as it is unlikely to perform in the same way as other assets. It’s important to remember, however, that like any investment, gold is not without risk, and its value can fall as well as rise.
2. It can provide a reliable hedge against inflation
Inflation, or rate at which the prices of the goods and services we use regularly increase over time, can eat into the purchasing power of our money.
Gold has historically proven to be an effective hedge against inflation, as its value isn’t dependent on economic and political stability, unlike many other assets.
As the cost of everyday items goes up, often the price of gold does too, meaning it can help maintain your purchasing power over time, whilst the real value of cash erodes. According to the London Bullion Market Association (LBMA), which governs the gold price globally, if you had bought an ounce of gold for around £230 back in April 2004, and kept another £230 as cash, as at April 2024, the gold would be worth around 683% more. However, the cash would not have increased in value and, due to inflation, would actually be worth less*.
Including gold in your portfolio can therefore help mitigate the impact of inflation, making it an important diversifier.
Thinking of Investing in Tax-Free Gold?
Speak with The Royal Mint’s wealth management team today and discover how you could diversify your investment portfolio, hedge against inflation, and secure your family’s future with tax-free gold.
3. …and also act as a hedge against currency movements
During periods of economic and political instability, currencies can fluctuate sharply, whereas gold cannot be devalued by inflation or monetary policy decisions. Gold is priced globally in US dollars, so when the dollar weakens, gold becomes relatively less expensive for holders of other currencies, boosting demand.
If the pound weakens against the US dollar, it takes more pounds to purchase the same amount of gold, making gold more valuable in sterling terms and helping to protect investor’s wealth.
4. Gold is a liquid investment
Part of gold’s appeal is that it is a tangible asset that can be held and stored. It can be easily bought and sold by investors, making it a very liquid investment. This can be extremely useful if investors need to convert their assets into cash quickly.
The same cannot be said, for example, of investments such as property, which can take a long time to sell.
How can I buy gold?
Gold is more accessible than you might think, and there are several ways to invest. Physical investments in gold are most commonly in the form of coins or bars. Costs start at less than £100, increasing right up to hundreds of thousands of pounds.
Other ways to invest in gold include buying gold digitally. For example, The Royal Mint’s digital gold product DigiGold, enables you to purchase a fractional amount of a large gold bar which is held securely in The Vault® at The Royal Mint, so you won’t have any concerns about security. The minimum you can invest is £25, with larger sums to invest.
Alternatively, you may decide to invest through an exchange-traded fund (ETF) that tracks the price of gold and backs their gold holding with physical gold. Find out more about these different options in our article How to buy gold.
Remember that gold, like all investments, can fall as well as rise in value and you may get back less than you invested. Similarly, the past performance of gold, in common with all investments, is not a guide to future performance.
The Royal Mint makes it easy to buy and gives you a wide range of different gold product options to choose from, so that you can find the right one to suit your circumstances and stage of life.
Speak with The Royal Mint’s wealth management team today and discover how you could diversify your investment portfolio, hedge against inflation, and secure your family’s future with tax-free gold.
*Comparison calculations are based on the LBMA PM fix gold price taken between 01/04/2004 and 01/04/2024, and the Barclays Benchmark Overnight Cash Index between 01/04/2004 and 01/04/2024.
* Links with an * by them are affiliate links which help Rest Less stay free to use as they can result in a payment or benefit to us. You can read more on how we make money here.
Thinking of Investing in Tax-Free Gold?
Speak with The Royal Mint’s wealth management team today and discover how you could diversify your investment portfolio, hedge against inflation, and secure your family’s future with tax-free gold.