What drives the price of gold?
Gold has diverse sources of demand, including jewellery (33%), technology (7%), investment (40%) and central banks (20%).
The short-term impact of financial markets is undeniable, however, the long-term importance of other sources of buying is even more so.
Gold is, on the one hand, often used as an investment to protect and enhance wealth over the long term, but on the other hand it is also a consumer good, via jewellery and technology demand. During periods of economic uncertainty, it is the counter-cyclical investment demand that drives the gold price up.
During periods of economic expansion, the pro-cyclical consumer demand supports its performance. Combined, these factors give gold the ability to provide stability under a wide range of economic environments.
The gold price reached 40 all-time highs in 2024. Typically, investors have concerns about buying an asset after such strong upward momentum, so why now?
Gold had a remarkable 2024, returning 28% (in Sterling terms). Its momentum has continued into 2025, with a further 7 all-time highs at time of writing.
And it's not just a short-term phenomenon, gold has returned 11.7% p.a. over the past 20 years to 31 December 2024.
Whilst existing investors have benefited from recent and longer-term returns, a run up in the price naturally prompts potential investors to question the timing of potential new allocations.
An answer can be found in the multiple potential drivers of the gold price from here:
1. Significantly lower long-term global interest rates – despite the short-term uncertainties being caused by the change of US President.
2. Continued above trend central bank purchases – the flip side of the changing US administration as central banks seek to continue to diversify their reserve assets.
3. Geopolitical tensions – even if we see a cessation of current active conflicts, they have been a sad reminder of underlying tensions which are unlikely to easily disappear. The upcoming election in Germany and the current incumbent political difficulties in France and Canada provide additional political uncertainties.
Would owning gold pose a significant reputational risk if the gold price falls?
Gold can be susceptible to price swings. It is more volatile than government bonds but less volatile than many equity indices, other commodities and alternatives due to the diverse underlying sources of demand. Any downward price movement also needs to be judged relative to the performance of other asset classes, not in isolation. So short term capital loss is always possible, but the long-term prospects are good.
Gold does not produce any income, and even worse it costs money to own it. Why is it a good investment?
A widely perceived drawback of gold is that it does not provide any regular income, unlike other asset classes such as equities, bonds or property. The reason for this is simple: gold has no credit risk. There is no counterparty payment promise that can be broken.
This means that investors depend on price appreciation to benefit from allocations to gold. And gold's strong performance is no coincidence: fundamentally it is a by-product of underlying supply and demand dynamics, which combine a natural scarcity with diverse sources of demand including jewellery, technology and central banks alongside investors including pension schemes.
The extractives sector has historically faced ESG concerns. What is the gold mining sector doing to address this?
The World Gold Council works to ensure that gold mining is carried out responsibly, partnering with our members and the broader industry to implement standards that drive stewardship and sustainable practices. In 2019, we launched the Responsible Gold Mining Principles, a standard that is mandatory for our members and defines what responsible gold mining means today. They are a comprehensive set of principles that cover commitments to climate action, health and safety, human rights, gender diversity and supply chain integrity.
More recently, The World Gold Council, in collaboration with Mining Association of Canada, ICMM and The Copper Mark, have launched the Consolidated Mining Standard Initiative (CMSI) which aims to consolidate all their voluntary responsible mining standards into one global standard. This will create a less complex standards landscape that serves the needs of all stakeholders, sets a high bar for responsible mining, and drives continuous improvement across the entire mining and metals industry.
The proposed standard, assurance framework and governance model have been published for public consultation and the CMSI is beginning work on integrating feedback from a wide range of stakeholders.
In addition, gold has a potential role to play in reducing investor exposure to climate-related risks. Gold's lack of downstream emissions can reduce the overall carbon intensity of an investment portfolio. Further decarbonisation projects that are underway across the complete gold production process will increase the positive contribution gold allocations can make to the projected carbon profile, ‘implied temperature' and climate target alignment of portfolios.
Furthermore, gold's value is less likely to be negatively impacted by a rising carbon price, also offering investors a degree of protection from the likely policy responses needed to accelerate the move to a decarbonised economy.
Analysis suggests that gold has the potential to deliver stronger investment returns than many mainstream asset classes under most long-term climate scenarios, particularly if climate impacts create or exacerbate investment market volatility.
Can an allocation to gold reduce overall portfolio risk?
Alongside reducing climate risk for investors, allocating to gold can also reduce total portfolio risk. Recent analysis indicates the most appropriate strategic allocation for institutional investors to gold lies somewhere between 2.5% - 10%. The ‘optimal' allocation varies depending on existing portfolio structures. Broadly speaking, the higher the initial risk in the portfolio – whether in terms of volatility or concentration of assets – the larger the required allocation to gold, within the range in consideration, to provide a similar scale of offset of that risk.
Some LGPS are also already investing in gold, typically held within multi-asset funds, in recognition of its combined potential capital appreciation and portfolio risk reduction characteristics.
But where would we physically store any gold we own? Would it be safe?
Physically owning gold does require investors to consider their storage and insurance considerations. But there are multiple ways for institutional investors to allocate to gold without taking individual physical possession. These include physically backed ETFs, futures, mutual funds, multi-asset funds and gold mining stocks.
Each of these investment types carries its own risk/ return profile. The World Gold Council does not provide investment advice or recommendations, but we can work with you and your investment adviser to help you understand the benefits and considerations of the different ways of investing in gold.
How can my Scheme work with the World Gold Council?
Portfolio analysis: We can analyse how an allocation to gold will affect the risk/ return profile of your Scheme.
Invite us to a meeting: We can provide training, discuss the case for investing in gold, and present our portfolio analysis.
To find out more, get in touch with the World Gold Council's Institutional Investor Relationships team: [email protected]
