Gold has had a notable period of investor attention. After years in which it was somewhat dismissed as an irrelevant relic — no yield, no earnings, no obvious role in the era of central bank omnipotence — the precious metal has reasserted itself as a portfolio consideration for international investors. Understanding what drives its performance and what role it might play in a portfolio requires looking beyond the short-term price charts.
What has driven gold higher in recent years
Several factors have contributed to gold's sustained investor interest:
Central bank buying. Emerging market central banks — led by those in Asia, the Middle East, and Eastern Europe — have been net purchasers of gold at historically elevated rates. Diversification away from US dollar reserves, partly motivated by the use of financial sanctions as a foreign policy tool (most prominently following Russia's 2022 exclusion from SWIFT), has increased demand for a reserve asset held outside the global banking system. This is a structural shift, not a cyclical one.
Geopolitical uncertainty. Gold's reputation as a safe-haven asset is well established. Periods of elevated geopolitical risk — regional conflicts, escalating trade tensions, political instability in major economies — tend to support gold prices as investors seek assets that are not counterparty-dependent.
Dollar dynamics. Gold and the US dollar tend to move inversely — a weaker dollar makes dollar-priced gold cheaper for holders of other currencies, supporting demand. Dollar weakness in particular periods has been a tailwind.
Inflation concerns. Despite the progress central banks have made in reducing headline inflation, residual concerns about the durability of the disinflation and the long-run consequences of large increases in money supply have supported gold's role as an inflation hedge. In practice, gold's track record as a short-run inflation hedge is mixed — it responds more reliably to real interest rates (nominal rates minus inflation expectations) than to inflation itself.
Gold vs Bitcoin: competing stores of value?
Bitcoin has been marketed by its proponents as "digital gold" — a finite asset with no central issuer, serving as a store of value outside the traditional financial system. The comparison is instructive but inexact.
Where gold has the advantage:
- Thousands of years of history as a store of value
- Physical, tangible, and not dependent on energy or technology infrastructure
- Held by central banks and institutional investors worldwide
- Lower volatility than Bitcoin — considerably so
- No single technology risk (no protocol vulnerability, no hard-fork risk)
Where Bitcoin's case has merit:
- Genuinely finite supply (21 million coins, hard-coded)
- Easier to hold, transfer, and divide in digital form
- Potential for asymmetric upside if adoption continues to grow
- Growing institutional ownership through regulated ETFs (spot Bitcoin ETFs approved in the US in January 2024, significantly broadening accessibility)
Where Bitcoin is weaker as a portfolio asset:
- Extreme price volatility makes it difficult to use as a genuine store of value
- Regulatory uncertainty remains, despite recent progress in some jurisdictions
- Concentration of ownership (early holders and large entities own a disproportionate share)
- No yield, no earnings — even harder to value than gold
The honest conclusion is that they serve different purposes. Gold is a genuine low-volatility portfolio diversifier with a track record. Bitcoin is a high-volatility speculative asset with option-like characteristics — potentially significant upside, but with the possibility of substantial losses. Most serious portfolio frameworks do not treat them as interchangeable.
How much gold to hold
Most evidence-based portfolio frameworks suggest that a gold allocation of around 5–10% of the overall portfolio provides meaningful diversification benefits without excessive concentration in a non-yielding asset.
At 5%, gold can reduce portfolio volatility and provide a modest hedge against tail risks (financial crises, currency debasement, geopolitical shocks) without materially dragging on long-run returns. Beyond 10%, the opportunity cost — of not holding equity or yield-generating assets — begins to compound significantly.
Investors who hold gold primarily as a hedge should also hold other assets that can generate returns in calmer, growth-oriented markets. Gold tends to underperform in environments of strong economic growth and rising real yields — precisely when equities and real estate perform well.
How to invest in gold
Physical gold. Bullion coins (Britannias and Sovereigns are CGT-exempt in the UK, being legal tender) and bars provide direct ownership of the metal. Physical gold requires storage — either at home (not recommended for large quantities) or with a vaulting service (which charges a custody fee). It is unencumbered by counterparty risk. In the UAE and GCC, buying physical gold is straightforward — the Dubai Gold Souk and licensed dealers across the Emirates offer accessible routes to owning gold jewellery, coins, and bars, and gold has significant cultural importance in the region.
Gold ETFs. Exchange-traded funds backed by physical gold (such as SPDR Gold Shares or iShares Physical Gold) offer an efficient and liquid route to gold exposure. They can be bought and sold in seconds, held within many investment accounts, and charge modest annual fees. They do not carry the storage and insurance costs of physical gold, but they do carry a modest counterparty element — you rely on the fund issuer holding the underlying gold as claimed.
Gold mining stocks. Mining companies offer leveraged exposure to gold prices — their profits rise and fall more than proportionately with the gold price, since their cost base is relatively fixed. However, they also carry operational risk (mine geology, labour disputes, regulatory issues, hedging policies) that means their performance diverges significantly from physical gold at times. Mining ETFs provide diversification within the sector.
Gold futures and options. These are sophisticated instruments for professional investors and traders. They are not appropriate for most retail or wealth management clients.
Tax treatment of gold in the UK
For UK residents and non-residents with UK tax obligations:
- Physical gold is typically subject to capital gains tax on disposal. UK legal tender coins (Britannias and Sovereigns) are exempt from CGT.
- Gold ETFs held outside a tax wrapper are subject to CGT on disposal and income tax on any income distributions.
- Gold held within an ISA or SIPP is sheltered from UK income tax and CGT in the usual way.
- There is no SDLT on gold purchases. No VAT applies to investment gold bullion in the UK.
When gold does poorly
Understanding when gold underperforms is as important as knowing when it shines. Gold tends to be a weak performer in environments characterised by:
- Strong, broad-based economic growth (equities typically deliver superior returns)
- Rising real interest rates (gold bears no yield, so its opportunity cost rises)
- Dollar strength (makes gold more expensive in non-dollar terms)
- Low geopolitical risk and high investor confidence
Investors holding gold as a long-term portfolio component should expect extended periods of flat or declining real returns. The value of gold is most evident when the rest of a portfolio is under stress — in that environment, it provides resilience rather than growth.
This article is for general information purposes only. It does not constitute personal investment advice. The value of investments, including gold, can fall as well as rise. Past performance is not a guide to future returns. Tax treatment depends on individual circumstances. Global Investments recommends seeking independent financial advice — contact us to speak with our team.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.