Markets & Economy

Text size: 


The benefits and risks of investing in gold

December 26, 2013

We're often asked about the advantages and disadvantages of investing in gold and other commodities. Here's food for thought from Christopher Philips, a senior analyst with the Vanguard Investment Strategy Group.

Chris PhilipsGold has been a part of economic life in many cultures going back thousands of years. As an asset, it tends to be particularly attractive during periods of economic uncertainty or political instability. Obviously, some investors have done very well by owning gold at various points in history. Others have caught "gold fever" just as prices were peaking and then watched their investments plummet in value.

At Vanguard, we encourage clients to be cautious about gold and other commodities. Almost by definition, commodity prices can be extremely volatile—rising and falling rapidly based on changing economic and political conditions, and on the whims of the marketplace.

What about the Precious Metals and Mining Fund?

Vanguard Precious Metals and Mining Fund (ticker: VGPMX) invests in companies that are involved in mining or exploration for metals and minerals. It's not a "pure" precious metals fund, and does not invest in gold directly.

Learn about the fund »

In recent years, we've watched the value of gold and other precious metals appreciate significantly, but as the global financial crisis receded, so did those prices. Investors who made substantial bets on gold back in 2011 may have regretted that decision as prices dropped significantly over the following two years. We've gone through several of these boom-and-bust cycles during the past half century.

So you may be wondering, "Is gold a good investment?" My response would be twofold:

  • Why are you interested in gold?
  • How much risk are you comfortable taking?

Supply and demand ... and guesswork

Gold, like all commodities, has no means of traditional valuation. Bonds, on the other hand, pay interest, and many stocks pay dividends, while non-dividend-paying stocks generally have some expectation of corporate revenue that serves as a means to gauge their intrinsic value. In other words, stock and bond investors have something with which to ascertain how much those assets are worth.

Gold has no such characteristics. Its price is based solely on supply and demand from multiple global interests. Attempting to derive a valuation or expected return is difficult at best. It's guesswork in most cases.

Secondly, at many points in history, gold has had a spurious relationship to inflation, despite its often-hyped reputation as a "real asset" (i.e., one that's physical or tangible). One need only look at the last decade or so to see how poor the relationship between inflation and gold prices has been. Over this period, inflation in the United States has been well contained even as bullion prices moved from around $300 per ounce to close to $2,000 per ounce, and back down to $1,230 as of December 5, 2013 (source: Thomson Reuters). Buying gold as an inflation hedge may or may not prove effective, as prices have been mostly dependent on the global supply/demand relationship, rather than on inflation rates.

Finally, gold prices are notoriously volatile. Since 1968, they've experienced volatility in excess of equities (20% versus 16% for U.S. stocks, in terms of annualized standard deviation of returns. Source: Vanguard, based on gold price data from Thomson Reuters and the performance of the S&P 500 Index.) Also, gold went through a nearly 22-year bear market, when prices declined from a high of $670 an ounce in mid-1980 to $258 by early 2001 (source: Thomson Reuters). That translates to a –4.5% annualized return—before inflation.

So, if you're leery of taking risk and you're primarily interested in gold because someone—a TV pundit, for example—led you to believe that gold is a risk-free asset and a perfect hedge against inflation, you could be in for an unpleasant surprise. That's especially true if you're acquiring a substantial position. But if you have a well-diversified portfolio and your situation is such that you can endure the risks and concerns I've outlined, then an allocation to gold may be worth exploring.

In other words, whether gold has a place in your portfolio ultimately depends on your tolerance for risk, your time frame, and your goals. Just be aware that a specialized, concentrated asset like gold comes with risks that are unique.



  • All investing is subject to risk, including the possible loss of the money you invest.
  • Investments that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
  • Diversification does not ensure a profit or protect against a loss.
  • There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Past performance is no guarantee of future returns.
PrintComment | E‑mail | Share | Subscribe