2024 has been an excellent year for the broader market, with all the major indexes hovering around all-time highs.
After increasing by just 9% between 2021 and the end of 2023, gold has had a breakout year in 2024. With a 28.7% year-to-date (YTD) return, gold is slightly outperforming the S&P 500's (^GSPC 0.61%) 26.6% YTD gain.
Here are some factors that can drive the price of gold, the role gold can play in a diversified portfolio, and different ways to invest in gold.
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Factors that affect the price of gold
Gold is a commodity, so the price can move based on several macroeconomic factors.
Lower interest rates can lead to lower capital costs and spur investment in new projects for gold miners, boosting supply.
Central banks may decide to increase their gold reserves, leading to higher demand and prices. According to Reuters, the People's Bank of China was the largest official sector buyer of gold in 2023. Sustained demand out of China could help drive long-term appreciation in the price of gold.
Gold-based luxury goods and industrial processes that use gold can also lead to higher gold demand.
It's also worth understanding how gold prices can differ based on the currency it is quoted in. For example, a strong U.S. dollar relative to other currencies can mean a lower gold price in U.S. denominated gold. Here's a look at the performance of gold in different currencies compared to the S&P 500 over the last decade.
Gold may have underperformed the S&P 500 over the last decade, but not by much in other currencies. The U.S. stock market has been stronger than many other stock markets of developed countries in recent years. For example, using Japanese yen to buy gold, instead of investing in the Japanese stock market, would have been a superior investment.
Investing in gold versus investing in stocks
Assets can do just about anything in the short term, so there's no telling how gold will stack up compared to a U.S. equity benchmark in a year. However, the S&P 500 will probably continue outperforming gold over the long term if the U.S. economy continues to grow.
The S&P 500 has been an excellent long-term investment because leading U.S. companies have grown in value. From companies that have been in business for hundreds of years to newer, tech-oriented companies, U.S. corporations are earning more money thanks to sustained U.S. innovation, favorable conditions for business, growing populations, and growing global industrialization and consumption.
A bet against the S&P 500 in favor of gold is basically saying that the U.S. will lose its edge on the global stage, or that the factors influencing gold will lead to sustained price appreciation that outpaces the S&P 500. For example, if gold mining slows due to environmental concerns or central banks ramp up a gold stockpile, gold could outpace the S&P 500 even if the S&P 500 puts up solid gains. Still, it's probably best for most investors to view gold as a small part of a portfolio, rather than as the dominant holding in a long-term plan.
Ways to invest in gold
There are plenty of ways to buy gold. You can buy gold jewelry or bullion. But that usually involves paying a premium to the spot price and comes with security risks and potential storage fees.
There's also the option to invest in companies that mine for gold. Investing in gold miners or gold mining exchange-traded funds (ETFs) that pay dividends is a way to collect passive income from gold. However, gold miners often face geopolitical risks and must manage costs to ensure financial stability. Gold miners can also be somewhat unreliable forms of passive income. For example, Newmont (NEM 4.40%), which is one of the most valuable U.S.-based gold miners by market cap, paid $1 per share in 2024 dividends compared to $1.60 in 2023 and $2.20 in 2022, even though 2024 was the best year for gold prices during that period.
Perhaps the simplest way to invest in gold is through a gold ETF. Gold ETFs like the SPDR Gold Shares ETF (GLD 1.29%) and the iShares Gold Trust (IAU 1.33%) use custodians that hold gold on their behalf. Both ETFs charge an annual expense ratio (0.25% for the iShares Gold Trust and 0.4% for the SPDR Gold Trust). But these fees can be well worth it for the simplicity and liquidity advantages of investing in "digital gold" rather than physical bullion.
Gold can serve as a role player in a diversified portfolio
Incorporating gold into a portfolio of other assets, such as equities, bonds, certificates of deposit, and high-yield savings, can be a good way to achieve diversification. However, gold isn't a good way to earn reliable passive income. Gold can also be hard to buy and sell unless you are investing in a gold-focused ETF.
Gold can grow in value over time based on supply and demand dynamics and central bank policies, whereas the stock market grows in value based on economic expansion and U.S. leadership in several sectors. Investors who don't own any gold may want to look more closely at the SPDR Gold Shares ETF or the iShares Gold Trust, which can serve as foundational gold holdings without the security or liquidity concerns of buying physical gold.
