Should you invest in gold during stock market turmoil?

29 June 2016

When the markets opened on Friday after the EU Referendum Leave result was announced, the FTSE 100 index of the largest companies listed on the London Stock Exchange plunged more than 8% at one point before recovering some ground to close 3.2% lower. This was a huge fall for one day.

On Monday the FTSE 100 index continued to fall, closing down 2.6% at 5982.2. But on Tuesday it swung back up by 2.6%.

Today, Rebecca O'Keeffe, head of investment at stockbroker Interactive Investor says: “Investors, who are still trying to work out whether current market levels pose and opportunity or a threat, are coming down firmly on the side of opportunity with equities across the UK and Europe up strongly for a second day. With global central banks all trying to reassure markets, prices are stabilising and volatility is falling. However, it is still very early in the process and significant political and market risks remain, so we may start to see some investors start to sell the rally, which could see markets pare back some of the gains.”

These market swings are what we call ‘volatile markets’. And the market turmoil of the past week has triggered a "flight to safety", as investor look for safe haven investments. A traditional ‘safe haven’ is gold and so it’s no surprise that the gold price has risen steeply since Friday.

Why do worried investors turn to gold?

Gold is one of the few safe haven investments whose value tends to be uncorrelated with other assets. Since the end of April gold demand has spiked, due to growing concerns over global growth, as well as the uncertainty a Brexit vote would bring for Britain's economy.

The strongest argument for holding gold is its insurance properties. A gold bar is often reached for in periods of political and economic uncertainty. And there is evidence that the price of gold is correlated with market uncertainty, it behaves differently to other asset classes and tends to rally while other assets are falling. For this reason some investors always hold a little bit of gold in their portfolios.

On Friday, Adrian Ash, head of research at, said: “This is just the kind of crisis which gold helps savers and investors insure against.

“Gold offers certainty and security as stock markets and currencies sink, just as it did during the 2008 meltdown. The difference is that this shock was clearly signposted, and many private investors didn't wait for today's result to get prepared.”

However, gold is not a suitable investment for everyone. And before buying you should examine the arguments against holding it.

Many independent financial advisers tell their clients not to hold gold because they don't consider gold to be an 'investment' at all.

When investors buy shares in companies traded on the stock market they often look at the investment’s income generating ability. They consider the value that they are prepared to place on future dividends that they expect to be paid out to shareholders by the company. However, gold produces no income at all – it’s value is entirely subjective.


My favourite quote on this is from Alan Dick, a certified and chartered financial planner at FortyTwo Wealth Management. He once told me: "Investing' in gold is taking a punt on whether a greater fool will buy it off you for a higher price sometime soon. One can put together all sorts of arguments about supply and demand to justify the likelihood of such a greater fool materialising, but that doesn't change the fact that buying gold is simply speculating on a price movement.”

But, as a private investor, the odds are against you getting that speculation right. If big institutions and hedge funds are dumping gold then you can't compete.

Have you thought about when you’re going to sell your gold, and at what price? If you can’t answer these questions then you’re probably making an emotional rather than a rational investment decision. You’re investing in gold because everyone else is. And you could get badly burned.

If you're going to "speculate" in gold, then buy an exchange traded commodity (ETC), as this will enable you to get in and out quickly at low cost. ETCs are traded on the London Stock Exchange and you can buy them through most investment platforms.

The one that I prefer is the Source Physical Gold P-ETC, identified via its code SGLD.


Think of it like buying gold bars without the hassle and expense of having to store your gold somewhere. The ETC provides investors with the performance of the gold spot price through certificates backed by gold bullion, held in JPMorgan Chase Bank’s London vaults.

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