Why Buy Gold? Pros and Cons of Investing in Gold
Why buy gold? Whether investing in gold is worthwhile depends on the role the metal is meant to play in your portfolio. Gold pays no interest and fluctuates noticeably, but it does not depend on any debtor and is traded worldwide. This page sets out the main arguments for and against – with time periods and sources. Past performance is no guarantee of future results.
Does gold preserve purchasing power?
The most important argument for gold is the long-term preservation of purchasing power. Unlike money, gold cannot be created at will. According to calculations by the World Gold Council, the gold price in US dollars rose by an average of around 8% per year from the end of the gold standard in 1971 to the end of 2024.
In years when US inflation was between 2% and 5%, gold also rose by around 8% on average, according to the same analysis. These averages, however, hide long periods in which gold lost value in real terms. Anyone who bought at the wrong time sometimes had to wait decades. Past performance is no guarantee of future results.
No counterparty risk – what does that mean?
A gold bar is not a promise to pay. A bond depends on the debtor paying, a share on the company’s success, a bank deposit on the bank. Physical gold, by contrast, has no issuer that can default. The World Gold Council therefore describes gold as an asset without credit risk.
This only applies to physical ownership, however. With certificates or exchange-traded notes, you usually hold a claim against an issuer, not the metal itself. If you have physical gold stored by a third party, what matters is that the bars are legally allocated to you and held separately from the custodian’s own assets.
Why do central banks buy gold?
Central banks hold gold as part of their currency reserves because it does not depend on any other state. In the third quarter of 2026 they bought 321.2 tonnes net, according to the World Gold Council. From January to September 2026 the figure was 675 tonnes, 6% more than in the same period of the previous year.
Only part of this is officially reported: in the third quarter, around 63% of purchases remained unattributed. The largest reported buyers were the People’s Bank of China with 63 tonnes and the National Bank of Poland with 40 tonnes. Over the ten years to 2024, central banks accounted for around 21% of net demand, according to the World Gold Council.
This demand supports the market, but it is no guarantee. Central banks can reduce their purchases or even sell at any time.
How has gold behaved in crises?
Gold is regarded as a safe haven. There is evidence for this, but no rule without exceptions. During the global financial crisis, the gold price rose by 21% in US dollars from December 2007 to February 2009, while stocks fell sharply worldwide. Gold was also in positive territory during the stock market declines of 2020 and 2022, according to the World Gold Council.
The World Gold Council also shows that the correlation between gold and stocks tends to turn negative during particularly sharp market crashes. Gold can therefore stabilise a portfolio in such phases. But it is not immune to falls: in acute sell-offs, gold is sold too, for example when investors need liquidity.
Is the gold price a bubble?
After strong rises, the question of a gold price bubble comes up regularly. It cannot be answered seriously, because nobody knows the ‘right’ price of gold. History does show, however, how deep setbacks can be.
In 1980 the average gold price was $615 per ounce; in 1999 it was only $279 – a fall in annual averages of around 55% over almost two decades. 2026 was volatile too: at the end of January gold reached a record high of $5,589.38; on 4 November 2026 the price was around $4,061, a good 27% lower.
Over the long term, gold fluctuates by around 16% per year on average (annualised volatility, BullionVault analysis over six decades). Anyone buying gold should be able to withstand declines of this magnitude.
No interest, but costs
Gold produces no running income: no interest, no dividends, no rent. The only return is a possible price increase. When interest rates rise, holding gold becomes less attractive compared with interest-bearing investments.
Then there are costs: the premium over the pure metal value, the spread between buying and selling price, and storage and insurance. In Germany, gold receives favourable tax treatment. Under § 25c UStG, investment gold is exempt from VAT. This covers bars with a fineness of at least 995/1000 and coins of at least 900/1000 that were minted after 1800 and are or were legal tender.
Under § 23 EStG, gains from a sale are tax-free in Germany if more than one year passes between purchase and sale. Within that period, gains remain tax-free as long as all private disposal gains in the calendar year are below €1,000.
Pros and cons at a glance
Whether gold suits you depends on your investment horizon and your risk appetite. This page is not a substitute for investment advice.
- For: no default risk of a debtor with physical ownership
- For: tradable and recognised worldwide
- For: often stabilising in past crises
- For: in Germany exempt from VAT and free of income tax after one year
- Against: no interest or dividends
- Against: significant fluctuations and long losing streaks possible
- Against: costs for premium, spread, storage and insurance
