Why is the price of gold so high?

Find out what drives the price of gold, investment options, benefits, limitations and alternatives.

If you’re thinking about investing in gold, find out the pros and cons and how you can do it in a simple way.

Why is gold so valuable? 

Gold has a number of characteristics that make it such a valuable asset. Unlike other financial assets, gold cannot be manufactured. It is a scarce and finite metal that needs to be mined. This makes it less susceptible to speculative cycles. Furthermore, gold is neither depleted nor consumed, unlike other commodities such as oil or wheat. Yet it serves many purposes: gold is made into jewellery, integrated circuits and even components for electric cars, as well as being used in art and jewelry or stored in gold bars.

Irrespective of what it is used for, its neutral chemical composition means that it cannot react in the presence of other elements. This means that, literally and figuratively, in terms of investments, it does not wear out or lose its lustre. The amount of gold available on the market is fairly stable over time, unaffected by supply and demand. This is why, as well as being an excellent option for investors, gold is an important part of the reserves of various central banks around the world. But why is the price of gold so high?

What are the drivers of the price of gold? 

The price of gold is influenced by various factors:

Dollar value

There is usually an inverse relationship between the value of gold and the value of the dollar, meaning that when the dollar appreciates, gold tends to depreciate and vice versa. This is because gold is priced in dollars, so a stronger US currency makes gold more expensive and reduces demand for it.

Interest rates

Another important factor is interest rates. As interest rates rise, income-producing assets become more attractive, reducing the appeal of gold, which does not pay interest or dividends. On the other hand, when interest rates are low, the opportunity cost of holding gold falls, making this precious metal a more attractive option for investors looking to protect their capital.

Economic context

In times of recession or high inflation, gold is often seen as a safe haven due to its ability to hold its value when other assets, such as equities or real estate, may struggle. Investing in gold during these periods can be an effective strategy for protecting your portfolio from market volatility. The same is true during periods of instability, such as military conflicts or political crises, which tend to push up the price of gold. 

How has the price of gold performed recently?

Looking at the longer term, we can see that gold has performed remarkably well, recording all-time highs

Source: Scottsdale Bullion & Coin

Since the beginning of the century, this asset has only fallen in five years, after rising strongly overall. It reached an all-time high at the end of 2012, in the midst of the financial crises of 2008 and 2011. After some ups and downs, it rose again in the early days of the pandemic. 

In 2022, shortly after the start of the war in Ukraine, gold reached a new high, driven by the uncertainty of the war. This was quickly followed by a sharp decline to a 15-month low, penalised by expectations of a sharp rise in interest rates. This reversal may seem surprising, but it also suggests that despite its ascribed stability, it is in fact not entirely immune to economic, sector-specific and market volatility. In 2024, gold reached new highs, largely due to geopolitical tensions, escalating conflicts and expectations of further easing of US interest rates. These developments reinforce the perception of gold as a resilient asset, especially in times of global uncertainty.

What are the pros and cons of investing in gold?

As gold tends to move in the opposite direction to equities, especially during recessions, it is generally regarded as a safe haven asset. Gold tends to be more protected against inflation and rising and falling stock markets. In times of political and social volatility, investors who own gold protect their wealth. Investing in gold can also be a way of diversifying your investment portfolio, as it retains its value even when other assets are in decline. 

On the other hand, investing in gold does involve some risk. In the form of bars, it is an asset that is particularly sought after by those who want to preserve their wealth – and for whom capital appreciation is a secondary objective. Other forms of exposure, like buying shares in gold mining companies, are subject to much of the market volatility that buying gold seeks to avoid. Finally, when markets become unstable, the fact that gold is perceived to be a safe haven asset can lead to hasty, fear-driven decisions.

How to gain exposure to gold

There are several ways to invest in gold, each with its own characteristics and suited to different investor profiles. 

1. Buying gold bars directly

Buying physical gold bars is a traditional and tangible form of investment. It allows you to own an asset that retains its value over time and is not subject to the fluctuations of the financial markets. However, there are challenges to this form of investment. Secure storage must be considered, which can include vaults or specialised custody services such as those offered by Banco Carregosa. Liquidity is also an important issue, as it can be more difficult and time-consuming to sell physical gold than it is to sell financial assets.

Target audience: Ideal for investors who value the security and tangibility of their assets and are prepared to deal with the challenges of storage and liquidity. 

2. Shares in mining companies

Investing in shares of companies involved in the mining and production of gold is an indirect form of exposure to this precious metal. These companies can offer income in the form of dividends, especially if they are well managed and have a profit distribution policy. However, this type of investment is not without risk: in addition to fluctuations in the price of gold, profitability can be affected by factors specific to the company, such as its management, operational efficiency and the conditions of the mines in which it operates. Investing in the shares of mining companies therefore requires careful analysis of the companies in question.

Target audience: Recommended for investors who want exposure to gold with the potential for additional income through dividends, and who are comfortable with the volatility and risks associated with corporate performance and the mining industry.

3. Gold-based exchange-traded funds (ETFs)

ETFs are a convenient and affordable way to invest in gold. These funds replicate the price of gold or of a related index, without the need to physically own it. ETFs can be bought and sold like shares, making them highly liquid. In addition, the minimum investment can be as low as the price of a single ETF, making them a good option for retail investors. Another advantage is the lower associated cost structure, which tends to be lower than buying physical gold or shares in mining companies.

Target audience: Suitable for retail investors or those looking for a practical and affordable way to invest in gold with liquidity.

4. Gold futures and options

For more seasoned investors, gold futures and options offer a way to profit from future movements in the price of gold. These instruments allow for a high degree of leverage, which can magnify both gains and losses. However, they are generally best suited to investors who understand the market well and have a high appetite for risk, as price movements can be rapid and substantial.

Target audience: Recommended for experienced high-risk investors who are comfortable with speculation and the potential to make and lose large amounts in a short time.

Alternative investments to gold

Gold may be the best known and most sought-after precious metal with a 6,000-year history, but it’s not the only one with investment potential. Metals such as silver, iridium and palladium also have their place in the market and can be interesting alternatives for diversifying your portfolio.

Silver: has a long history as a store of value and is widely used in the manufacture of electronics, solar panels and medical equipment. It also tends to follow gold in terms of appreciation, albeit with greater volatility, which can provide short-term profit opportunities for more attentive investors.

Iridium: less well known, but playing a growing role in new technologies. One of iridium's greatest attractions is its use in the production of hydrogen, an area that is expanding with the growing demand for cleaner and more sustainable energy solutions. 

Platinum: a precious metal to consider as an alternative to gold and with great potential to grow – platinum is increasingly used in fuel cells.·Palladium: another precious metal with strong industrial appeal, particularly in the automotive sector, where it is used in catalytic converters to reduce harmful emissions. Demand for palladium has increased in recent years, driven by the need for more environmentally friendly vehicles, making it an investment option worth considering.

Banco Carregosa, the support you need to invest in gold

Investing in gold may be an option for certain investors, provided the pros and cons are carefully considered. If you want to diversify your investments with assets that will protect you in uncertain times, gold could be a choice. 

Before you take this step, take some time to evaluate your options. Determine if gold fits into your overall investment strategy and portfolio. You can rely on Banco Carregosa’s team of experts to guide you according to your specific profile, so that you can make the most of this asset and safely protect and grow your wealth.